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 ERITREA








Model Production Sharing Contract 1997


MODEL PETROLEUM PRODUCTION SHARING CONTRACT


SECTION I: SCOPE AND DEFINITIONS


1.1 Scope


1.2 Definitions


SECTION H: TERM, SURRENDER AND TERMINATION


2.1 Term


2.2 Exploration Period


2.3 Surrender During Exploration Period


2.4 Development and Production Period


2.5 Termination


SECTION HI: GENERAL RIGHTS AND OBLIGATIONS OF


THE CONTRACTOR


3.1 Rights of the Contractor


3.2 Obligations in Respect of the Conduct of Petroleum Operations


3.3. Abandonment and Disposal of Assets


3.4 Joint Liability and Indemnity


3.5 Local Employment, Training and Preference


3.6 Environmental and Safety Measures


3.7 Registration and Office


3.8 Records and Reports


SECTION IV: GENERAL RIGHTS AND OBLIGATIONS OF THE


GOVERNMENT AND THE MINISTER


4.1 Rights of the Government and the Minister


4.2 Obligations of the Government and the Minister


SECTION V: WORK AND EXPENDITURE OBLIGATIONS AND BUDGETS


5.1 Exploration


5.2 Bank Guaranty


5.3 Discovery and Appraisal


5.4 Development and Production


5.5 Management Committee


SECTION VI: GOVERNMENT PARTICIPATION


6.1 Government Participation


SECTION VH: COST RECOVERY AND PRODUCTION SHARING


7.1 Cost Recovery


7.2 Production Sharing


SECTION VIH: PRODUCTION RATE AND MARKETING


8.1 Production Rate


8.2 Marketing


SECTION IX: UNITIZATION


9.1 Unitization


SECTION X: DOMESTIC CONSUMPTION


10.1 Domestic Consumption


SECTION XI: RENTALS, ROYALTIES AND BONUSES


11.1 Annual Rentals














l


11.2 Royalties


11.3 Production Bonuses


11.4 Signature Bonus


SECTION XD: VALUATION AND MEASUREMENT


12.1 Valuation


12.2 Measurement


SECTION XIII: NATURAL GAS


13.1 Non-associated Natural Gas


13.2 Associated Natural Gas


13.3 Other Provisions


SECTION XIV: FINANCIAL AND FISCAL MATTERS AND ACCOUNTING


14.1 Finances


14.2 Taxation


14.3 Foreign Exchange Control


14.4 Accounting


SECTION XV: IMPORTS AND EXPORTS


15.1 Imports


15.2 Exports


SECTION XVI: GOVERNING LAW AND DISPUTES


16.1 Governing Law


16.2 Resolution of Disputes


16.3 Force Majeure


SECTION XVH: GENERAL


17.1 Confidentiality


17.2 Waiver


17.3 Notices


17.4 Headings and Amendments


ANNEX A: COORDINATES OF THE CONTRACT AREA


ANNEX B: MAP OF THE CONTRACT AREA


ANNEX C: ACCOUNTING PROCEDURE


PARAGRAPH C.l: GENERAL PROVISIONS


C.1.1 Purpose


C.1.2 Definitions


C.1.3 Inconsistency


C.1.4 Accounting Records and Reports


C.1.5 Language and Units of Account


C.1.6 Audit and Inspection Rights of the Government


C.l.7 Payments


C.l.8 Arm’s-Length Transactions


C.l.9 Currency Exchange Rates


C.l. 10 Revision of the Accounting Procedure


C.1.11 Accrual Basis


C.l.12 Values and Treatments


PARAGRAPH C.2: CLASSIFICATION, DEFINITION AND


ALLOCATION OF COSTS AND EXPENDITURES














2


 C.2.1 Segregation of Expenditures


C.2.2 Exploration Expenditures


C.2.3 Development Expenditures


C.2.4 Operating Expenditures


C.2.5 Service Expenditures


C.2.6 General and Administrative Expenditures


PARAGRAPH C.3: COSTS, EXPENSES, EXPENDITURES AND


CREDITS OF THE CONTRACTOR


C.3.1 Costs Aiiowable Without Further Approval of Government


C.3.2 Credit Under the Contract


C.3.3 Duplication of Charges and Credits


PARAGRAPH C. 4: PETROLEUM OPERATIONS EXPENDITURES


C.4.1 Definition for the Purpose of Determining Compliance


with the Minimum Exploration Expenditures Obligation


C.4.2 Definition for the Purpose of Section VH


PARAGRAPH C.5: RECORDS AND VALUATION OF ASSETS


C.5.1 Records


C.5.2 Inventories during Initial Exploration Operations


C.5.3 Inventories in Subsequent Operations


PARAGRAPH C.6: PRODUCTION STATEMENT


C.6.1 Production Information


C.6.2 Submission of Production Statement


PARAGRAPH C.7: VALUE OF PRODUCTION AND PRICING


STATEMENT


C.7.1 Value of Production and Pricing Statement Information


C.7.2 Submission of Value of Production and Pricing Statement


PARAGRAPH C.8: PROFIT SHARE ACCOUNT STATEMENT


C.8.1 Quarterly Statement


C.8.2 Annual Statement


C.8.3 Separation of Expenditures


C.8.4 Basis of Accounting


C.8.5 Recoverability and Deductibility of Petroleum Operations


PARAGRAPH C.9: STATEMENT OF EXPENDITURE AND RECEIPTS


C.9.1 Expenditures and Receipts Statements





C.9.2 Quarterly Statement


PARAGRAPH C.10: FINAL END-OF-YEAR STATEMENT


C.10.1 Final End-of-Year Statement


PARAGRAPHC.il: BUDGET STATEMENT


C.ll.l Annual Budget Statement


C.11.2 Annual Budget Statement Due Dates


ANNEX D: PARTICIPATION AGREEMENT


1. INTERPRETATION


2. PARTICIPATING INTERESTS


3. OPERATOR AND DUTIES OF THE OPERATOR


4. OPERATING COMMITTEE AND WORK PROGRAMS











3





 5. COSTS AND EXPENSES


6. BANK ACCOUNTS, PAYMENTS TO THE OPERATOR


AND DEFAULT


6.1 Bank Accounts and Payments to the Operator





6.2 Default of Payment


7. MATERIAL AND EQUIPMENT


8. RELATIONSHIP OF THE PARTIES AND TAX PROVISIONS


9. SURRENDERS AND TRANSFERS


10. DISPOSAL OF PRODUCTION


11. SOLE RISK OPERATIONS


12. CONFIDENTIALITY


13. LIABILITY AND MUTUAL UNDERTAKING


14. GOVERNING LAW


15. ARBITRATION


16. FORCE MAJEURE


17. NOTICES


18. TERM


19. FINAL PROVISIONS


ANNEX E; LETTER OF GUARANTY FOR THE_


EXPLORATION PERIOD

























































































4


MODEL PETROLEUM PRODUCTION SHARING CONTRACT


THIS CONTRACT, made and entered into on this_ day of _19_, by and


between:





The Government of the STATE OF ERITREA (hereinafter referred to as the


"Government"), represented for the purpose of this Contract by the Minister of Energy


and Mines (hereinafter referred to as the "Minister"),





and


, a corporation duly organized and existing under the laws


of_ (hereinafter referred to as the "Contractor"), represented for this


Contract by _, its_.





WITNESSETH:





WHEREAS, the title to all Petroleum existing jnits.piaftifal condition on, in or under the


State of Eritrea, which includes internal .waters, islands, archipelagic.-Waters, territorial


sea and its beds and subsoils, exclusive -economic zone and\conti'nental shelf is vested in


the State and the people of Eritrea^ -... V ' " - %


WHEREAS, the Government -Wishes to.-pfomofe the exploration, development and


production of the Petroleum on, in,or\u'nder the Contract Area and the Contractor


desires to join and assist the /Go-yerrtfnent in the exploration, development and


production of potential Petroleuni-.depbsits within the Contract Area;


WHEREAS, the Contractor represents that it has the financial ability, technical


competence and professional skills to carry out the Petroleum Operations herein


described; and


WHEREAS, the Petroleum Operations Proclamation No. 40/1993 provides that a


Petroleum Agreement may be entered into between the Minister, representing


Government and any Person, either by competitive bidding or subject to the directives of


the Council of Ministers, by direct negotiations;


NOW, THEREFORE, the Government hereby grants to the Contractor in consideration


of the payments, covenants and representations contained herein and made by the


Contractor, the sole right to explore, develop and produce Petroleum in the Contract


Area and to exercise other rights granted by this Contract, and further in consideration of


the undertakings and covenants contained herein, the Parties agree as follows:























5


 SECTION I: SCOPE AND DEFINITIONS





11 Scope


This Contract is a Petroleum Agreement within the meaning of the


Petroleum Proclamation and it shall cover Petroleum Operations in


the Contract Area. The Contract Area shall be described and


delineated in Annex A hereto and shall be periodically adjusted in


accordance with the provisions of this Contract. During the term of


this Contract all Petroleum production resulting from the conduct of


Petroleum Operations shall be divided between the Parties in


accordance with the provisions of Sections VI through XIQ hereof.


1.2 Definitions


In this Contract, unless the context- clearly indicates otherwise,


words in the singular include the Vplunal, the plural indicates the


singular. ''•••V'-- v.. '


1.2.1 "Accounting Procedure-" "means the,’ accounting procedure and


reporting requirements set forth in Annex C hereto.


1.2.2 "Affiliate" or "Affiliated;'Pef,sdn" means any juridical Person directly


or indirectly effectively. Controlling, or effectively controlled by, or


under direct or indirect effective common control of a specified


Person. For the-piirposes of this definition, "control," when used


with respect, tt) any specified Person, means the power to direct,


administer and/or dictate policies of such Person (it being understood


that it is not necessary to own directly or indirectly fifty percent


(50%) or more of such Person's voting shares to have effective


control over such Person; however, ownership, whether direct or


indirect, of fifty percent (50%) or more of such Person's voting


shares shall automatically indicate effective control). The terms


"controlling" and "controlled" have meanings corresponding to the


foregoing term "control".


1.2.3 "Appraisal Area" means the area within the Contract Area subject to


an appraisal work program and budget as set forth in Section 5.3.2.


1.2.4 "Appraisal Well" means a Well drilled within the Contract Area,


following a Discovery, for the purpose of delineating the Petroleum


reservoir(s) to which the Discovery relates in terms of thickness and


lateral extent and estimating the quantity of recoverable Petroleum


therein.


1.2.5 "Assets" means all pipes, pipelines, downhole Well equipment,


wellhead equipment and all non-recoverable surface and sub¬


surface equipment used in the conduct of Petroleum Operations.





6


1.2.6 "Associated Natural Gas" means Natural Gas which exists in a


reservoir in solution with Crude Oil or, as gas-cap gas, in contact


1.2.7 with Crude Oil, and is or could be produced with Crude Oil.


"Barrel" means a quantity consisting of 158.984 litres (forty-two





(42) United States Gallons) at standard atmospheric pressure of


1.01325 bar and temperature of 15.56° Celsius (Sixty degrees


1.2.8 Fahrenheit).


" Calendar Month" means any of the twelve (12) months of the


Calendar Year.


1.2.9 "Calendar Quarter" means a period of three (3) consecutive months


beginning 1 January, 1 April, 1 July and 1 October and ending 31


1.2.10 March, 30 June, 30 September and 31 December, respectively.


"Calendar Year" means a period of twelve (12) months commencing


1 January and ending the .fblloyrihg 31 December,..according to the


1.2.11 Gregorian Calendar. ; ' • . • \ V"


" Commercial-. Discoveiy" as defined., irr the Petroleum Regulations,


means a Discovery that -.cah be produced commercially after


consideration of all pertinent - Operating and financial data collected


during the penfqfrnaiipe of the appraisal work program and


otherwise, including'*but not limited to Crude Oil or Natural Gas


recoverable reserves, sustainable production levels and other relevant


technical and economic factors, according to generally accepted


international petroleum industry practice.


1.2.12 "Contract Area" means the area described and delineated in Annex A


and Annex B attached hereto as adjusted in accordance with the


provisions of this Contract regarding term, surrender and


1.2.13 termination.


For the purposes of this Contract "Contractor" means the Contractor,


its successors or any assignee or assignees of any interest of the


1.2.14 Contractor.


"Crude Oil" means all Petroleum regardless of specific gravity which


are produced in liquid state, at atmospheric pressure at the wellhead


or gas/oil separator including asphalt, and ozokerites, or which are


1.2.15 extracted from Natural Gas, including distillate and condensate.


"Day" means a calendar day unless otherwise provided.





1.2.16 "Delivery Point" means a point agreed to by the Parties in writing


pursuant to this Contract.





7


1.2.17 "Development and Production Operations" as defined in the


Petroleum Regulations, means operations for or in connection with


1.2.18 the production of Petroleum.


"Development and Production Period" means the period set forth in





Sections 2.1 and 2.4.


1.2.19 "Discovery" as defined in the Petroleum Regulations, means a





significant occurrence of Petroleum recovered at the surface which


was not previously known to have existed and which is measurable


1.2.20 by generally accepted petroleum industry practice.


"Dollar(s) " or " $" means United States Dollar(s).





1.2.21 "Drilling" as defined in the Petroleum Regulations, means operations


for or in connection with the perforation of the earth's surface,


whether the hole is vertical, inclined'br horizontal, and includes all


operations for preventing the .hole..-'from becoming filled by


1.2.22 extraneous Materials (including-, ivater) and the fitting of wellheads,


or coring or logging, and "aiiy.operations.kiciden'tal thereto.


"Effective Date'- '.mdans the date , this‘ Contract is signed by the


Minister ancfthe Contractor;'..


1.2.23 "Environmental Damage."'.as defined in the Petroleum Regulations,





means soil erosion^ removal of vegetation, destruction of wildlife and


marine organises;’’pollution of groundwater, pollution of surface


water, land or’sea contamination, air pollution, noise pollution, bush


1.2.24 fire, disruption to water supplies, disruption to natural drainage,


damage to archaeological, paleontological and cultural sites.


"Exploration Expenditures" mean expenditures made in conducting


Exploration Operations hereunder, but excluding expenditures made


within the area of a Field after a Commercial Discovery has been


1.2.25 declared. These expenditures shall be determined in accordance with


the Accounting Procedure described in Annex C hereto.


"Exploration Operations" as defined in the Petroleum Regulations,


mean geological, geophysical and geochemical studies, aerial


mapping, seismic surveys, investigations relating to the subsurface


geology including structure test Drilling, stratigraphic test Drilling,


Drilling of Exploration Wells and Appraisal Wells, and .other related


1.2.26 activities such as surveying, drill site preparation and all work


necessarily connected therewith, that is conducted in connection with


exploration for Petroleum.


"Exploration Period" means the period set forth in Sections 2.1, 2.2


and 2.3.





8


 1.2.27 "Exploration Well" means a Well, other than an Appraisal Well,


drilled in the course of Exploration Operations.


1.2.28 "Factors Constituting Control" as defined in the Petroleum


Regulations, means:





protocols, agreements or contracts binding the Contractor


with another contractor or with third parties and relating to


the conduct of operations and management of their


companies, to the sharing of expenditures and profit, or to


the sharing and disposal of products and, if such companies


are liquidated, to the distribution of Assets;


provisions of the Contractor's Articles of incorporation and


by-laws relating to the head office, the rights attached to


capital stock, the majority required in annual general


meetings;


the list and nationalities, of ahy physical or legal Person which


holds more thap teh-percent (10%) of the Contractor’s capital


stock; . .{ '••. " .. \


when the Contractor's debts maturing in more than four (4)


years exceed .its shareholders equity: names, nationalities and


countries, of residence of physical or legal Persons who hold


debt ifi ah amount of more than twenty percent (20%) of the


said shareholders' equity as well as the nature and term of


loans' obtained from such Persons; and





generally, any transaction the result of which is to make one


or more physical or legal Persons gain or lose a controlling


interest in the operations and management of the Contractor.





1.2.29 "Field" as defined in the Petroleum Tax Proclamation, means an area


consisting of a Petroleum reservoir or multiple Petroleum reservoirs


all grouped on or related to the same individual geological structure


features or stratigraphic conditions from which Petroleum may be


1.2.30 produced commercially, the development of which has been


approved by the Minister. All reservoirs overlying and underlying a


Field shall constitute part of such Field.


"Government" as defined in the Petroleum Proclamation, means the


Government of Eritrea and its administrative divisions, and all the


officials in any capacity who conduct the business of or exercise


1.2.31 authority within the Territory of Eritrea.


"Income" means every sort of revenue from whatever source derived


and in whatever form paid, credited or received in relation to





9


 Petroleum Operations irrespective of whether it is paid, credited or


received within or outside Eritrea.


1.2.32 "Initial Regular Production " as defined in the Petroleum Tax


Proclamation, means the commencement of regular production from


1.2.33 the first development area developed by the Contractor.


"LIBOR" means the London Interbank Offered Rate of interest on six


(6) month Dollar deposits as quoted at 11:00 a.m. in London, United


Kingdom, by the National Westminster Bank or any other bank


1.2.34 agreed upon by the Parties, on the first banking Day of each month


for which interest is due.


"Maximum Economic Efficient Rate" means the maximum economic


rate of production of Crude Oil in a Field, without excessive rate of


decline of production or excessive loss of reservoir pressure, and in


1.2.35 accordance with generally accepted- practices in the international


petroleum industiy and the provisions i# Section 8.1.


"Minister" or "Ministry*.. h$ cjefined in the. Petroleum Proclamation,





means the Minister of 'Energy and Mines, Or 'the Ministry of Energy


1.2.36 and Mines, respectively, or any.successors in jurisdiction thereto.


"Natural Gas" means-all Petroleum which at atmospheric conditions


of temperature and-.jyessure is in a gaseous phase, including wet


mineral gas, (fry 'rijmeral gas, wet gas and residue gas remaining after


the extraction;--processing or separation of Crude Oil from wet gas,


1.2.37 as well as..n6n-hydrocarbon gas or gases produced in association


with liquid or gaseous hydrocarbons.


"Non-associated Natural Gas" means Natural Gas other than


Associated Natural Gas.


1.2.38 "Operator" means the Party and its successors designated to conduct


the Petroleum Operations.


1.2.39 "Participating Interest" means the Government's interest in


Petroleum Operations for a particular Field as set forth in Section


1.2.40 6.1.


"Participation Agreement" means the agreement entered into in


accordance with Section VI hereof and Annex D hereto.


1.2.41 "Party" means the Government or the Contractor.





1.2.42 "Parties" means the Government and the Contractor.


1.2.43 "Person" means any natural or juridical person.





to


 1 2.44 "Petroleum" as defined in the Petroleum Proclamation, means all


natural organic substances composed of carbon and hydrogen called


Petroleum, including Crude Oil and Natural Gas, and all' other


mineral substances, products, byproducts and derivates that are


found in conjunction with the same.





1.2.45 "Petroleum Agreement" as defined in the Petroleum Proclamation,


means a contract or other arrangement between the Government and


a contractor to conduct Petroleum Operations.





1.2.46 "Petroleum Operations" as defined in the Petroleum Proclamation,


means Exploration, Development and Production Operations in the


Contract Area, including without limitation, all operations related to


exploration, development, extraction, production, field separation


treatment (excluding refining), transportation, storage, sale or


disposition of Petroleum to the Delivery Point, environmental


protection, plugging of Wells and. -.abandoning production facilities.


The operations shall not incjude\ transportation beyond Delivery


Point, nor any process ofrefirtmg or anyvhandljng of Petroleum


which has been treated in "'a-.refinery or-;liqu.efection plant or Natural


Gas treatment .plant,.{. \ . .. \ \


1.2.47 "Petroleum -'.Qperations C6sts" as‘ defined in the Petroleum Tax


Proclamation, means’-, the •, costs and expenses incurred by the


Contractor for..tJh$"p£irposes of conducting Petroleum Operations


1.2.48 under this Contract,’’as set forth in Annex C hereto.


"Petroleum-••’Proclamation" means the Petroleum Operations


Proclamation No. 40/1993 as published in the Gazette of Eritrean


1.2.49 Laws.


"Petroleum Regulations" means the Petroleum Regulations, Legal


Notice No. 24/1995 as published in the Gazette of Eritrean Laws.


1.2.50 "Petroleum Tax Proclamation" means the Petroleum Operations


Income Tax Proclamation No. 41/1993 as published in the Gazette


1.2.51 of Eritrean Laws.


"State" as defined in the Petroleum Proclamation, means the State of





Eritrea.


1.2.52 "Subcontractor" as defined in the Petroleum Proclamation, means any





Person with whom a Contractor establishes a contractual relationship


for the provision of services required for performance under a


1.2.53 Petroleum Agreement.





"Territory of Eritrea" as defined in the Petroleum Proclamation,


means its land territory, internal waters, islands, archipelagic waters,


ll





 territorial sea and its beds and subsoils, exclusive economic zone and


continental shelf


1 2 54 "Well" as defined in the Petroleum Regulations, means any opening


in the ground made or being made by Drilling or boring, or in any


other manner, in connection with Exploration Operations or


Development and Production Operations, other than a seismic hole.





SECTION II: TERM, SURRENDER AND TERMINATION





2.1 Term


2.1.1 This Contract shall consist of an Exploration Period, and a


Development and Production Period, both of which may run


concurrently.





2.1.2 This Contract shall remain iq effect..during the initial term of the


Exploration Period and aU/exterisions thereof..arid shall automatically


terminate in its entirety at the. end of the.Expldrafiori Period, except as


otherwise provided. ajncftas to any Field. \





2.1.3 After expiration of the Exploration Period, this Contract shall remain


in effect as io each -Field 'during the Development and Production


Period for the Fj$M; arid-shall automatically terminate with respect to


each Field upon the -expiration of the Development and Production


Period foi1 the;.relevant Field.





2.2 Exploration Period


2.2.1 The initial term of the Exploration Period provided by this Contract


shall be ( ) years, commencing on the Effective Date hereof.


2.2.2 The Contractor shall begin Petroleum Operations within ninety (90)





Days after the Effective Date. Petroleum Operations shall be deemed


to have begun when the Contractor has actually commenced the


movement of personnel and equipment to the Territory of Eritrea for


the purposes of conducting Petroleum Operations and, specifically, on


the date of departure for a direct destination to the Territory of


Eritrea of plane or vessel transporting such personnel or equipment or


both.


The Exploration Period shall have a first extension and a second


2.2.3


extension, following the initial term, for successive terms of


_(_) years and_(___) years, respectively, each upon the


Contractor's election to make application to the Minister at least sixty


(60) Days prior to the termination date of the current term of the


Exploration Period, provided that the Contractor has fulfilled the








12


 exploration work and expenditure obligations set forth in Section 5.1


for the current term under this Contract.


In order to enable the Contractor to complete Drilling, logging,





testing or plugging of any Exploration Well which is actually being


drilled, logged, tested or plugged at the end of the second extension


of the Exploration Period, the Minister may grant a further extension


to such second extension for such a time as he determines may be


reasonable, which in any event shall not extend the term of the second


extension by more than six (6) months.


2.2.4 In order to expeditiously complete the evaluation of a Discovery, the


Minister shall extend the term of the Exploration Period up to


_months beyond the second extension of the Exploration


Period for each area designated as an Appraisal Area upon the


Contractor's submission to the Minister, at least sixty (60) Days prior


to the termination date of the seconCextension, of an appraisal work


program and budget under Section 5.3.i; provided, however, that the


Contractor has fulfilled ;ffie\expforation w.ofk .and expenditure


obligations set forth i'n Section 5.1 for.;the current term under this


Contract. Thereafter, ‘if the Contractor shall determine that an


Appraisal Area\does not contain , a Commercial Discovery and if no


further extension is granted under Section 2.2.5, the Exploration


Period for the relevant 'App’fafshl Area shall terminate.


2.2.5 Upon justification by* the Contractor and in addition to the extensions


set forth above, "the Minister may extend the term of the Exploration


Period in iespect to the Appraisal Area of a Natural Gas Discovery


for a period up to _(_) years for the purposes of further


appraising and evaluating the Natural Gas Discovery and establishing


its economic viability as well as preparing a preliminary development


scheme for a Natural Gas project.





2.3 Surrender During Exploration Period


2.3.1 At or prior to the end of the initial term of the Exploration Period, the .





Contractor shall surrender at least twenty-five percent (25%) of the


original Contract Area


2.3.2 At or prior to the end of the first extension of the Exploration Period,


the Contractor shall surrender at least twenty-five percent (25%) of


the original Contract Area.


2.3.3 When calculating the surrender obligation under Sections 2.3 1 and


2.3.2, each area then designated as an Appraisal Area or a Field shall


be deducted from the original Contract Area





2.3.4 At or prior to the end of the second extension to the Exploration


Period, the Contractor shall surrender the remainder of the original


i.3


 Contract Area which is not included within an Appraisal Area or


Field.


The Contractor shall have the right to surrender, at any time, all or


2.3.5


part of the Contract Area not designated as a Field, upon giving the


Minister prior written notice.


2.3.6 The location and configuration of any area to be surrendered by the


Contractor under this Section shall be submitted for approval to the


Minister, which approval shall not be unreasonably withheld, sixty


(60) Days prior to the date of each surrender, provided however that


the size and shape of each portion being surrendered shall be


reasonably contiguous in order to facilitate further exploration, and


that the area being surrendered shall not be divided into more than


two (2) portions.


2.3.7 No surrender shall reduce the minimum amount of Contractor's


exploration work and expenditure \obljgations or the related bank


2.3.8 guaranty in respect thereof as* provided in Sections.5.1 and 5.2.


Any surrender under; Section 2.3.5 'shall be credited toward the


Contractor’s. next'suitender obligation, ilrider Sections 2.3.1 and 2.3.2.


2.3.9


Upon surrender of .any. area;*' the Contractor shall perform all


necessary cleanup, activities in accordance with sub-Article 11(10) of


the Petroleum Regulations and generally accepted practices in the


international petroleum industry, and shall take reasonable actions


necessary to-prevent hazards to human life, the environment or third-


party property. No surrender made in accordance with this Section


shall relieve the Contractor of its obligation to make payments due as


a result of surface rentals or any other financial commrtments


undertaken pursuant to this Contract prior to the effective date of any


such surrender.





2.4 Development and Production Period


2.4.1 The term of the Development and Production Period provided for by


this Contract in respect of a Commercial Discovery shall commence


on the date of adoption of the development plan as set forth in


2.4.2 Section 5.4.2.2 and shall continue until the _ (_*) annual


anniversary of that date.


The Contractor may, not later than one (1) year prior to the


expiration of the Development and Production Period, apply to the


2.4.2.1 Minister for an extension to the initial term.


An application for an extension shall be made in writing to the


Minister and shall be accompanied by:





14


(a) a complete and up-to-date detailed report on the total


production, sale and other disposal of Petroleum


from the relevant Field,


(b) a complete and up-to-date detailed report on the


actual revenues generated, royalties, taxes and other


fees paid to the Government;


(c) a detailed forecast of production rates, reserve


estimates, economic feasibility, number of years for


which the extension is applied for; and


(d) such other matters as may be required under the


Contract or as the Minister may reasonably require.


2A.2.2 The Minister may enter into good faith negotiations to grant


an extension where: •.


(a) the Contractor has'frilfilled all his obligations under the


Current-Development and'Pfockiction Period; and


(b) :. tfe proposals accompanying the application pursuant


.-To Section 2:4.2.I-(c) above are consistent with his


commitments to continue production and with the


.natiofiai: ihterest as determined by the Minister.


2.4.3 If, subsequent "to the designation of the area encompassing a


Commercial Discovery as a Field, the extent of the area encompassing


the Commercial Discovery is demonstrated to be different from that


designated in the development plan under Section 5.4.2.2, the Field


shall be adjusted accordingly, provided that the area covered shall be


entirely within the original Contract Area and is not subject to any


other Petroleum Agreement.


2.4.4 If the Contractor makes more than one Commercial Discovery, the


term of the Development and Production Period or extension thereof


for each Field embracing a Commercial Discovery shall be determined


for that Field in accordance with the foregoing provisions


independently of the term of the Development and Production Period


for any other Field.


2.4.5 The Contractor shall have the right to surrender all or part of the area


included within any Field upon giving the Minister one hundred eighty


(180) Days written notice of its intention to do so. The provisions of


Section 2.3.9 shall apply to this Section mutatis mutandis.











15


2.5 Termination





2.5.1 The Contractor may terminate this Contract by giving the Minister


one hundred eighty .(180) Days prior written notice. Termination


shall not relieve the Contractor of the performance of its obligations


outstanding hereunder prior to termination nor shall it affect its


obligations which survive the termination of this Contract. A


surrender of all the area included in the Contract Area shall constitute


a termination of this Contract.


2.5.2 The Minister may terminate this Contract by giving the Contractor





prior written notice for a period specified in Section 2.5.3, if any of


the following termination events occurs:





(a) if the Contractor willfully or negligently fails to comply with


the Petroleum Regulations or Petroleum Proclamation;


(b) if the Contractor fails to niake-any payment required under


this Contract, or fails-.ffc’comply with,any other Material


obligation that .it'has. assumed underfthjs'Cofitract;


(c) if the. Contractor fails to. comply, with any other proclamation,





regulation, or order," Crimy instruction which is specifically


issued ’to the Contractor'by the Minister or any department or


agency of (government in a manner which materially


affects fjoVeifnnient's substantive rights hereunder;


(d) if th.e 'Contractor fails to maintain the degree of financial


ability, technical competence and professional skill necessary


to carry out Petroleum Operations and such failure materially


affects the Contractor’s performance;


(e) if the Contractor becomes insolvent, makes a composition





with creditors, or goes into liquidation other than for


reconstruction or amalgamation;





(f) if the Contractor enters into an agreement providing for a


Person other than the Contractor to become entitled to, or to


any proceeds of sale of, any Petroleum, which, at the time the


agreement is made has not been but may be produced and


saved from the Contract Area, unless the terms of the


agreement have been approved in writing by the Minister


either unconditionally or subject to conditions, but the


preceding provisions of this paragraph shall not apply to:


(i) an agreement for the sale of such Petroleum under


which the price is payable after the Petroleum is


produced and saved; and





16


(ii) an agreement insofar as it provides that, after any


Petroleum has been produced and saved from the


Contract Area, it shall be exchanged for other


Petroleum,


(g) if there is a change in the Factors Constituting Control of any


entity comprising the Contractor, as defined in the Petroleum


Regulations, and the Minister serves notice in writing on the


Contractor that the Minister proposes to terminate this


Contract unless such a further change in the Factors


Constituting Control of the relevant entity as is specified in


the notice takes place within the period of three (3) months


beginning with the date the notice was served; and


(h) if Petroleum Operations are interrupted for more than one


hundred eighty (180) Days without the written approval of


the Minister. . ;- ';


2.5.3 The period of notice with'r'e.sp^ct to a termination event under


Section 2.5.2(b, e andr/Ti) above shall be thiriy(36) days, and with


respect to any oth6r t'erifhination evenCspecified in Section 2.5.2 shall


be ninety (90) \ day's. If, ho why eg'the Contractor remedies the


termination’everit within the period of the notice, the Minister shall


withdraw the notice, to the S^irne effect as if the termination event had


not occurred under; thj^’ Contract, unless a termination event of the


same type has previously occurred under this Contract, in which case


the Minister may;’but is not required to, withdraw the notice.


2.5.4 If a termination event specified in Section 2.5.2 is the result of Force


Majeure as set forth in Section 16.3, neither the occurrence of the


termination event nor the continuance of it unremedied shall result in


the termination of this Contract for so long as such Force Majeure


continues, and Section 16.3.5 is complied with.


2.5.5 When this Contract is terminated or expires, in whole or in part, the


Contractor shall wind up Petroleum Operations in the area as to


which this Contract has terminated or expired in an orderly manner


calculated to minimize harm or loss to the State, the environment or


any Person.


In the event of surrender of an Appraisal Area or a Field or


termination of this Contract, the Minister may require the Contractor


to continue for the account of the Government, Petroleum Operations


for Fields currently producing or capable of producing Petroleum


until the right and responsibility for continuing such operations have


been transferred to another Person or the Government or any agency


thereof but for a period not to exceed one hundred eighty (180) Days


after the date this Contract would otherwise terminate with respect to








17


 all or any portion of the Contract Area concerned; provided,


however, that the Government shall:





(a) bear all costs, risk and expenses of Petroleum Operations


during such take-over period to the extent this period extends


beyond the date that this Contract would otherwise terminate


and shall be entitled during this same period to all the


production and proceeds from the sale thereof; and


(b) advance to the Contractor the funds necessary to conduct


additional Petroleum Operations on a monthly basis.








SECTION ID: GENERAL RIGHTS AND OBLIGATIONS OF THE


CONTRACTOR





3.1 Rights of the Contractor


3.1.1 Subject to applicable laws and regulations, the-Contractor shall:


(a) have the Sole and exclusive-., right 'to conduct Petroleum





Operations..fn the Contract/Area in accordance with the


provisions of this Contract; ..


(b) have the right. ‘to. enter into the Contract Area and conduct


Petroleum": Operations there, but notwithstanding this


provision-arid the provisions of Section 3.1.1(a):


(i) permission may be granted to other Persons to


explore for, develop and produce minerals in the


Contract Area other than Petroleum, so long as the


activities of such Persons do not unreasonably


interfere with Petroleum Operations; and


(ii) rights of ways in the Contract Area of reasonable





scope and duration may be granted to other Persons


for the benefit of land adjacent to the Contract Area


but not so as to interfere with Petroleum Operations;


(c) have access over the Territory of Eritrea for the purpose of





constructing, laying, , operating and maintaining both onshore


and offshore pipelines, cables and any other facilities required


for Petroleum Operations;


(d) have the right, subject to the approval of the Minister, to use


water in the Contract Area for operational purposes, but the


Contractor shall not deprive any land, domestic settlement or


livestock watering place of the water supply to which they are


customarily entitled;


18





(e) have the right for the purposes of Petroleum Operations to


use gravel, sand, clay and stone in the Contract Area subject


to the limitations set forth in Section 3.1.1 (b);


(f) have the right to construct within the Territory of Eritrea,


such production and processing plants, power stations,


communication, transportation and shipping facilities and


other facilities as may be reasonably required for its operation


under this Contract;


(g) have the right to install and use radio, telephone and other


communication facilities. Such facilities shall be maintained


by the Contractor and shall be for its exclusive use for


purposes of its activities under this Contract, and shall be


subject to all Governmental regulations and be available for


reasonable or for emergency jjjse by the Government, free of


charge. ...


Such facilities shall ''be--so construtted -arid operated as not to


interfere withisifnilar installati'ons-.which exist, or may, with


the .peritifesibn of the •Government, be established in the


Territory of Eritrea’, foh public use or for the purposes of


defense; •. \ (i) * * * v


(h) have., the right to use, without discriminatory payment,


existing Triads within the Territory of Eritrea and shall permit


free--public use of roads constructed and maintained by it,


except such roads as the Contractor may, with the consent of


the Minister, declare to be for its exclusive private use; and


(i) have the right to use existing public harbors and airports in the


Territory of Eritrea upon payment of the port and harbor dues


or landing or other fees generally applicable in accordance


, with regulations, provided that such use is not so intense as to


interfere with public use of such harbors and airports. Subject


to the Petroleum Regulations, there shall be no dues or


charges payable by the Contractor or the Government for the


use of harbors or other shipping and transportation facilities


constructed by the Contractor and such facilities shall be for


the exclusive use of the Contractor for the transportation and


export of Petroleum and for other activities under this


Contract. Local fishermen and vessels of the Government's


navy shall have access to and shall have the right to make


reasonable use of harbors constructed by the Contractor


without charge and airports constructed by the Contractor


shall be available, without charge, for reasonable


Governmental use and for the purposes of defense





19


3.1.2 The Contractor shall not cany on Petroleum Operations on any part


of the land in the Contract Area designated for a public purpose but


may have surface access over, on and through such land for the


purpose of conducting Petroleum Operations, to the extent such


access does not interfere with the public purpose.


3.1.3 Subject to the Petroleum Proclamation and Petroleum Regulations,


the Contractor shall have the right to sell, assign, transfer, convey or


otherwise freely dispose of all or any part of the rights and interests


under this Contract to:


(a) any Affiliate subject to notification to the Minister but


without diminishing its obligations in the present Contract and


if at any time, thereafter, the Contractor should relinquish or


lose control of its Affiliate which will then cease to be an


Affiliate, the Contractor shall seek consent of the Minister;


and


(b) any technically and.-fioandally capable other Person with the


prior written con$erit of the Minister, y/hich'consent shall not


be unreasonably; •Withheld, provided, that where the Minister


gives a'negative decisionori.the gfounds of reasons of State,


he need not justify his -decision.


3.2 Obligations in Respect of.ijhfc. Conduct of Petroleum Operations


3.2.1 The Contract or..sh'all carry out the Petroleum Operations within the


scope of-.this Contract diligently, expeditiously and efficiently in


accordance with the Petroleum Regulations and generally accepted


international petroleum industry practice and pursuant to Section V.


The Contractor and its employees shall perform no business activities


in the Territory of Eritrea outside the scope of this Contract without


the prior written consent of the Minister.


3.2.2 The Contractor shall ensure that all Exploration Wells are properly


evaluated and where warranted, tested in accordance with generally


accepted international petroleum industiy practices.


3.2.3 The Contractor shall be entitled to employ any Person qualified in the


judgment of the Contractor to undertake Petroleum Operations on


the Contractor's behalf.


Any Subcontractor retained by the Contractor shall have the


necessary professional experience to perform the task to be assigned


and the Contractor shall ascertain that any Subcontractor shall abide


by all applicable laws and regulations of Eritrea peitaining to


Petroleum Operations and the relevant provisions of this Contract


The Contractor shall notify the Minister in writing of the name and








20


address of any Subcontractor retained within thirty (30) Days of such


retention


In addition, the employees of the Contractor and any Subcontractor


and his employees shall abide by the applicable laws and regulations


of Eritrea pertaining to Petroleum Operations and shall respect local


customs in the country.


3.2.4 The Contractor shall without prejudice to the provisions of Section


6.1.3 hereof:


(a) advance all necessary funds and purchase or lease all


equipment, Materials and supplies required to be purchased or


leased in connection with Petroleum Operations;


(b) furnish all the technical expertise and assistance, including


foreign personnel, required for.ihe Petroleum Operations;


(c) furnish all other funds: for the performance of Petroleum


Operations a$ may be fequired,..ih’dudiiig payment to foreign


entities ..that .. perform sendees as Subcontractors to the


Contractor';-.** .. \


(d) retain control \Of.all-property paid for with foreign currency


and brought'"-ihtb Eritrea under the rules of temporary


importation; and, as such shall be entitled to freely remove


same from Eritrea in accordance with the provisions of this


Contract; and


(e) provide acceptable working conditions and field


accommodations, including onshore and offshore installations,


and access to medical attention and nursing care, for all


personnel employed by it and ensure its Subcontractors do the


same with respect to their employees.


3.3 Abandonment and Disposal of Assets


3.3.1 The Contractor shall not, except where there is imminent and grave


danger to the safety and health of human life or a risk of significant


damage to the environment or a risk of significant economic loss,


abandon a Well or withdraw casing, tubing or downhole pumps of


other downhole equipment therefrom or remove surface equipment


used or useful in production therefrom, if any, without the Minister’s


consent. A written application for such consent shall be submitted to


the Minister within the following periods prior to such action being


proposed to be carried out:








21


(a) thirty (30) Days, in the case of action with respect to a


Well that is or has been producing within a development


area, and


(b) seventy two (72) hours, in the case of action with respect


to any other Well.


3.3 .2 Where the Contractor applies to abandon an Exploration Well in


which Petroleum of potentially commercial significance has not been


found, the Minister may request the Contractor to deepen, sidetrack


or test that Well or to drill an additional Well subject to the following


provisions:


(a) the Contractor may apply to participate in the proposed


operation;


(b) if the Contractor does not apply to participate or the Minister


rejects the application, arty’";, such additional Petroleum


Operations shall be..at..t'he\'sble cost, risk and expense of the


Government, and .the Minister shall -acfyande io the Contractor


the funds neCes'sairy to conduct tHe Drilling operations;


(c) the... Contractor shall- not' be obligated to undertake such


additional workifit will materially interfere with the conduct


of the Contractor's Petroleum Operations or if it is not


technically *pr.. operationally feasible; and


(d) if tji.e•‘ Contractor does not apply to participate or the Minister


rejects the application, the Minister shall keep the Contractor


informed about such additional work and in the event that the


operations undertaken under this Section 3.3 .2 result in a


Discovery which the Contractor elects to evaluate and/or


develop as a Commercial Discovery, the Contractor shall


reimburse the Government _ percent (_%) of the


costs and expenses incurred by the Government for the


conduct of the additional operations and such sum shall be


paid within thirty (30) Days of such approved application


made by the Contractor. If the Contractor does not make


such application or the Minister rejects the application, the


Minister may require the Contractor to surrender all its


rights over such Discoveiy.


3.3.3 The Contractor shall, within sixty (60) Days after termination or


expiration of this Contract or the surrender of part of the Contract


Area, or the expiration of the take-over period in Section 2.5.5, if


later, deliver to the Minister, free of charge, in good repair and


working order, all Wells within the area covered by the termination,


expiration, or surrender, then producing or capable of producing


Petroleum, together with all pipes, pipelines, downhole Well


2 2


equipment, wellhead equipment and all non-recoverable surface


and/or sub-surface equipment used in the conduct of Petroleum


Operations, unless the Minister requires the Contractor to plug the


Well


3.3 .4 Subject to the provisions herein, upon expiry or termination of this


Contract in any manner, the Contractor shall deliver to the


Government, free of charge, all equipment, installations and other


Assets whether fixed or moveable, used for the purpose of the


Petroleum Operations whether inside or outside the Contract Area.


3.3.4.1 The provisions of Section 3.3.4 shall not apply to Assets


which are still required by the Contractor in respect of an


area in Eritrea subject to another Petroleum contract and


which in the opinion of the Government are not necessary


for continued production of the Field delivered. Upon the


Governments request, the'...Contractor shall use its best


efforts to assign to the-...Govemment any agreement with


third parties which* ark desirable for eontinyed production.


3.3.4 2 At leajst sk.ipOnths before, .ekpiry. of this Contract, or within


forty fiyk(45) Days following notice of termination thereof,


the.'Gbvernment .and the Contractor shall jointly prepare a


list of the Ass.ets\wHich the Government requires to be


delivered .'t'p-if pursuant to this Section 3.3.4. Assets not


required by'* the Government may be sold or otherwise


disposed of by the Contractor.


3.3.4.3 All equipment and Assets may be sold or exchanged by the


Contractor in the conduct of Petroleum Operations


provided, however, that prior consent of the Minister is


obtained for each transaction in excess of twenty five


thousand Dollars ($25,000), such consent not to be


unreasonably withheld and to be given within forty-five


(45) Days of receipt of request from the Contractor.


Failure to respond within such period shall be deemed to


constitute consent. Exchanges and proceeds of sale shall


be accounted for as provided in the Accounting Procedure.


3.3.5 The Minister may decline the transfer and may require the Contractor


to remove all or some of the plants, appliances, installations, pipelines


and well platforms at no cost to the Government.. Should the


Minister accept the transfer, the Contractor shall be relieved of his


liabilities except with respect to its obligations to make payments due


under Section 2.3.9 hereof.











23


 3.4 Joint Liability and Indemnity





3.4 1 At any time where the Contractor consists of more than one Person,


their liability shall be joint and several except for the liability to pay


income tax, which shall be a liability personal to each Party


constituting the Contractor.


The Contractor shall supply to the Minister, a copy of the joint


operating agreement and related documents, including without


limitation, farm-in agreement, arrangements for financing Petroleum


Operations between those Persons, or between any of those Persons


and third parties no later than ten (10) Days following the signing of


such documents.


3.4.2 The Contractor shall indemnify, defend and save the Government


harmless against all claims, losses and damages of any nature


whatsoever caused by, or resulting from, any operation conducted


by or on behalf of the Contractor \iindpr the terms of this Contract,


arising on or after the EffeetiveVDate of tjhis Contract, including


without limitation, claims ior lois or damage to'property, or death of


or injuiy to Persons' ‘provided that if the\G6vemment elects to seek


such an indemnity ftoin the Contractor-, the Government shall notify


and consult.fyith the Contractor ..concerning such claim, loss, or


damage and, if appropriate; , the Contractor shall be joined as a Party


to any lawsuit or proceeding concerning such claim, loss, or damage.


The failure of.-the\Gorifractor to comply with the requirements of


Article 3 Oof the.-Petroleum Regulations shall in no way limit the


Contractor's, obligations under this Section.


3.4.3 To ensure that the Contractor meets its obligations to the Government


and third parties with respect to claims, losses and damages as


specified in Section 3.4.2, the Contractor shall maintain in full force


for the duration of this Contract, a third party liability insurance


policy/policies covering its activities and those of its agents,


Subcontractors and employees. To the fullest extent possible, such


insurance shall be placed with an Eritrean insurance company,


provided that the terms and costs are equivalent to those generally


available in worldwide insurance markets. A certificate evidencing


such insurance policy/policies shall be furnished to the Minister within


ninety (90) days of its effective date.


The limits, coverage, deductibles and other terms thereof shall be in


accordance with generally accepted practices in the international


petroleum industry and shall be reviewed annually by the


Management Committee.


To the extent that such third party liability insurance does not cover


part or all of any claims, losses and damages covered by Section








24


 3.4.2, the Contractor shall remain fully responsible for indemnifying


all such claims, losses and damages.








3.5 Local Employment, Training and Preference


3.5.1 The Contractor and the Subcontractors shall give preference to the


employment of Eritrean nationals in all Petroleum Operations to the


fullest extent possible, provided such nationals have the required


qualifications and experience. The Contractor undertakes to gradually


replace its expatriate staff with qualified Eritrean nationals as they


become available.


3.5.2 The Contractor shall provide training relating to the Petroleum


Operations for Eritrean nationals employed by the Contractor in the


Petroleum Operations until the expiry and termination of this


Contract. ; C...


3.5.3 In addition to the oblig&tiohs'set forth in. Section 3.5.2, the


Contractor shall estab'iish'-a- training. • :and. Employment program


approved by the Mtni^tef; for Eritreciji nationals and shall contribute a


minimum of -. E:-. Dollars (S , j-pef year, during the Exploration


Period, to bC.increased to , ;. ; Dollars ($__) per year during the


Development and Production Period, for the training of Eritrean


nationals as may. .be'designated by the Minister, commencing with the


Effective Date. \ ) '*• .


Payment shall'be made to the bank designated by the Minister on the


Effective Date for the first Contract year and on each anniversary of


the effective date thereof until the termination or expiration of the


Contract.


3.5.4 The Contractor shall and require its Subcontractors to give


preference to Eritrean Materials, products and services used in


Petroleum Operations where those materials, products and services


are of comparable quality as reasonably determined by the Contractor


or Subcontractors, as the case may be, and are readily available at


competitive international prices. In connection with the procurement


of goods and services from local sources, the Contractor shall, in


consultation with the Minister, establish appropriate tender


procedures to give effect to this Section.


3.5.5 The Contractor shall submit a report every Calendar Quarter detailing


the employment of Eritrean nationals and the utilization of Eritrean


Materials, products and services by the Contractor and its


Subcontractors, in a form to be specified by the Minister.











25


 3.6 Environmental and Safety Measures


3.6.1 The Contractor shall conduct Petroleum Operations in a safe and


proper manner in accordance with generally accepted international


petroleum industry practice and with the Petroleum Regulations.


The Contractor shall provide acceptable working conditions, as well


as living accommodations, access to medical attention and nursing


care in or near the Contract Area for all personnel employed by it in


Petroleum Operations. These benefits shall be extended to other


Persons who are engaged or assisting in the conduct of Petroleum


Operations in the Contract Area.


3.6.2 In the event of a blow-out, accident or other emergency, the


Contractor shall take immediate steps to bring the emergency


situation under control and protect against loss of life and property


and prevent harm to natural resources-and the general environment.





3.6.3 If the Minister reasonably determft^s that the Petroleum Operations


may endanger Persons- or ^property, haijn-.natiiral' resources or the


general environment,’cause pollution, hahn marine life, animal life or


plant life, or interfere With navigation abid fishing, he shall inform the


Contractor‘anti-me Contractor shall , take appropriate remedial action


within a reasonable period-. 6f time established by the Minister, in


accordance with standard international petroleum industry practices.


If the Contractor fal&.to’take any action, and without prejudice to the


provisions-of Article 11 of the Petroleum Regulations, the Minister


shall ordef -the* Contractor to take reasonable remedial measures and


order the Contractor to discontinue Petroleum Operations pending


the implementation of those measures.





The Contractor shall securely plug any Well that it abandons to


prevent Environmental Damage and shall remove all above-ground


production equipment, except as the Minister may otherwise direct.


3.6.4 Immediately upon the termination of this Contract for any reason,


unless the Government has granted an extension of time, and without


prejudice to Part V of the Petroleum Regulations, the Contractor shall


commence any reasonably necessary action as directed by the


Government to avoid or minimize Environmental Damage or hazard


to human life or third party property as a result of the Contractor’s


activities in the Contract Area. The provisions of this Section 3.6.4


shall survive the termination of this Contract.





3.6.5 The Contractor shall properly store Petroleum in receptacles


constructed for that purpose, and shall not store Crude Oil in an


earthen reservoir, except temporarily in an emergency.








26


 In the event an earthen reservoir is used temporarily in an emergency


to store Crude Oil, the Contractor shall restore the ground surface to


its prior condition within a period of time established by the Minister


in accordance with generally accepted practices in the international


petroleum industry.


3.7 Registration and Office


3.7.1 The Contractor shall register to do business with the appropriate





Eritrean authorities and shall establish and maintain an office in Eritrea


within three(3) months after the Effective Date. The Contractor’s


registered office in Eritrea shall have full authority to represent the


Contractor for all purposes of this Contract.





3.7.2 The Contractor shall notify the Minister, before Petroleum


Operations begin, of the name and address of the Person resident in


Eritrea who will supervise the Petroleum Operations, and prior notice


of any subsequent change shall be given jb the Minister.


3.8 Records and Reports :*"' :





3.8.1 The Contractor \shajl-. prepare such reports and keep such records as


required by' Tkw, the Petroleum. Regulations, this Contract, and


generally accepted procedures * and standards of the international


petroleum industry.':;-..;. \


3.8.2 Prior to qr immediately following the expiration or termination of


this Contract,, the Contractor shall deliver to the Minister all records


referred to in the Petroleum Regulations, including, without


limitation, magnetic tapes. The obligation created by this Section


3.8.2 shall survive the expiration or termination of this Contract.


3.8.3 In accordance with sub-Article 20 (3) of the Petroleum Regulations,


the Contractor shall provide to the Minister in appropriate form all


original data resulting from Petroleum Operations, whether or not


required for the reports and records referred to in Section 3.8.1 herein


above. The Government shall have title to all such original data which


shall only be disclosed pursuant to the provisions of Section 17.1


hereof.


The Contractor may export magnetic tapes, samples and any other


data solely for the purpose of processing or analysis outside Eritrea,


provided that a comparable record or sample is retained in Eritrea,


and provided further that such exported originals of magnetic tapes,


samples and any other data shall be returned to Eritrea by the


Contractor after processing or analysis.


3.8.4 In accordance with Article 25 of the Petroleum Regulations, the


Minister and his duly authorized representatives shall have full and


complete access to the Contract Area at all reasonable times with the


2 7


 right to observe Petroleum Operations, and to inspect, upon fifteen


(15) Days’ prior written notice to Contractor, all Assets, records,


books, accounts and data kept by the Contractor relating to


Petroleum Operations and this Contract The Minister and his duly


authorized representatives may make a reasonable number of surveys,


drawings, tests and copies for the purpose of implementing this


Contract. In doing so the Minister and his duly authorized


representatives shall be entitled to make reasonable use of equipment


and instruments of the Contractor and shall be given reasonable


assistance by the Contractor for such functions. The Contractor shall


afford the Minister and his duly authorized representatives all


transportation, accommodation and medical facilities and amenities


afforded to its own personnel in the Field, including the reasonable


use of office space and room and board, free of charge.








SECTION IV: GENERAL RIGHTS AND OBLIGATIONS OF THE


GOVERNMENT AND THJ\ MINISTER





4.1 Rights of the Government and the Minister " ‘





4.1.1 Without prejudibb-tcTthe Petroleum Regulations, the Minister may


require the'Contractor to .perform, an obligation which the Contractor


has failed to perform under-thisContract by giving reasonable written


notice, and after faifur^df the Contractor to comply with that notice,


may execute apy necessary works for which the Contractor shall pay


forthwith/The Minister may give notice to the Contractor to perform


an obligation-'hereunder at any time, but not later than forty-five (45)


Days after the termination or expiration of this Contract or surrender


of the part of the Contract Area to which the obligation relates.


4.2 Obligations of the Government and the Minister





4.2.1 The Government shall not unreasonably refuse to grant or renew any


visas, work and entry or exit permits necessary for personnel


employed in the Petroleum Operations by the Contractor or its


Subcontractors and their dependents; nor shall the Government


unreasonably refuse to grant any necessary right-of-way as may be


required by the Contractor or its Subcontractors, subject to any


general applicable laws or regulations.


4.2.2 The Minister shall use his best efforts to assist and expedite the


execution of Petroleum Operations carried on hereunder by rendering


all necessary and reasonable assistance in obtaining communication


permits, visas, work or other permits, authorizations, import or other


licenses, and right-of-way as may be necessary.


4.2.3 The Government undertakes to make available to the Contractor all


original data at its disposal including seismic information, field tapes,


28





 Well logs and all other geological and geophysical information


relating to the Contract Area; provided the Government is under no


obligation to make any classified or confidential information


available to the Contractor. The Contractor shall bear the actual cost


of copying all such information and data. However, should the


Contractor wish to acquire reprocessed seismic data, the Contractor


shall purchase such reprocessed data at prevailing rates.








SECTION V: WORK AND EXPENDITURE OBLIGATIONS AND BUDGETS


5.1 Exploration


5.1.1 . The Contractor shall carry out the following work obligations and


make the following Exploration Expenditures during the initial term


of the Exploration Period:


(a) Geological and geophysical operations, including


(_)kilomet£te of seisrriic surveys, or Dollar


equivalent 3-D-surveys, with a mihimurii expenditure of


_Dollars ' •($ _ )/' '••for-- such geophysical and


geological.operations; and


(b) The •Contractor' shall .-drill ___ Exploration Wells to a


minimum depth' '.of ‘_(_) metres per Well with a


Minimum-Drilling expenditure of_Dollars ($


)''for--'each such Well.


5.1.2 Should the Contractor make an application for the first extension of


the Exploration Period, it shall carry out the following work


obligations and make the following Exploration Expenditures during


the first extension to the Exploration Period:


(a) geological and geophysical operations, including the


acquisition and processing of_( ) line kilometers


of seismic surveys with a minimum expenditure of


_Dollars ($_) for such geological and geophysical


operations; and


(b) drill_(__) Exploration Wells to a minimum depth of


__(___) meters per Well with an anticipated


minimum Drilling expenditure of_Dollars ($_)


for each such Well.


5.1.3 Should the Contractor make an application for the second


extension of the Exploration Period, it shall carry out the following


work obligations and make the following Exploration Expenditures


during the second extension to the Exploration Period:





29


(a) geological and geophysical operations, including the


acquisition and processing of_(_) line kilometers


of seismic surveys with a minimum expenditure- of


_Dollars ($_) for such geological and geophysical


operations, and


(b) drill ( ) Exploration Wells to a minimum depth of


_( ) meters per Well with an anticipated minimum


Drilling expenditure of_Dollars ($_) for each


such Well.


The required minimum expenditure obligations set forth in Sections


5.1.1, 5.1.2 and 5.1.3 are expressed in constant Dollars of the month


of the Effective Date and shall be adjusted annually on the anniversary


of the Effective Date, so as to reflect the balance of the Contractor's


minimum expenditure obligations, as follows:


(a) at the end of each Calendar Yeiar of the Exploration Period,


the minimum expenditure obligations for the initial term of


the Exploration ‘-Period, the ..first -,-extension or second


extension;'' 'whichever is applicable,' shall be reduced in


accordance, with paragraph (b) below by the amount of


expenditure actually "made- during that year on seismic and


exploratory Drilling \y-6rk;


(b) for the purpose of making the adjustments provided for in


Sections--'’5.1.4 (a) and 5.1.5, all expenditures made on


seismic and exploration Drilling work in excess of the


amount specified in Sections 5.1.1, 5.1.2 and 5.1.3 (as


adjusted for inflation in accordance with paragraph (c)


below between (i) the month of the Effective Date, and (ii)


the month in the prior year corresponding to the month of


the Effective Date) shall be submitted to the Minister for his


approval, which approval shall not be unreasonably


withheld; and


(c) at the end of each Calendar Year of the Exploration Period,


in order to determine the minimum expenditure obligations


for the remaining years of initial term of the Exploration


Period, the first extension or second extension, whichever is


applicable, the balance of the minimum expenditure


obligations corresponding to such term at the end of the


preceding year, as reduced for expenditure under the


provisions of Section 5.1.4(a), shall be adjusted by


multiplying that amount by the number which is the sum of


one (1) and the decimal equivalent of the percentage change


in the monthly index of US Consumer Prices, seasonally


adjusted, as reported in the "International Financial


Statistics" of the International Monetary Fund between (i)


 the month in the year of the adjustment corresponding to the


month of the Effective Date and (ii) the month in the


preceding year corresponding to the month of the Effective


Date.


5.1.5 If, during the initial term of the Exploration Period or the first


extension thereof, the Contractor exceeds the expenditure obligations


for such period, then such excess may be credited towards the


expenditure obligations for the following extension or extensions of


the Exploration Period.





5.1.6 The fulfillment of any work obligations shall relieve the Contractor of


.the corresponding expenditure obligations; but the fulfillment of any


expenditure obligations shall not relieve the Contractor of the


corresponding work obligations. If the continuation of any Drilling


activity is precluded for justifiable technical reasons, prior to reaching


the minimum depth herein specified," the Minister shall authorize the


Contractor to terminate such activity and may deem the Contractor to


have met the work obligation‘in respect of that. Well or may specify an


appropriate and reasonable..substitute work obligation. Any dispute


related to the justification" for discontinuing''Drilling activity shall be


resolved by. a •bjn.dmg expert determination as provided in Section


16.2.1. V) t ’ .. "


5.1.7 Without prejudicg.-td.-fhe provisions of Part VI of the Petroleum


Regulations, die "Contractor shall prepare and submit to the Minister


for discussion, thirty (30) Days after the Effective Date, the following:


(a) a general statement of exploration work and budget for each


Calendar Year of the Exploration Period; and


(b) a detailed statement of the exploration work program and


budget for the current Calendar Year of the initial term of the


Exploration Period.


To the maximum extent possible, the Contractor shall involve


representatives of the Government in the preparation of the


statements required in (a) and (b) above.


5.1.8 The Contractor may, upon consultation with and notification to the


Minister, make changes to the detailed exploration work program


and budget therefor for any Calendar Year of the Exploration Period,


submitted pursuant to Article 18 of the Petroleum Regulations, if


those changes do not materially affect the original objectives of the


said work program and budget.


5.1.9 The Contractor shall prepare and submit to the Minister for


discussion, ninety (90) Days before the end of each Calendar Year in


the Exploration Period, the following:


31


(a) revisions, if any, to the general statement of exploration work


and budget for the remaining Calendar Years of the


Exploration Period; and


(b) a detailed statement of the exploration work program and


budget for the next Calendar Year in the Exploration Period.


5.2 Bank Guaranty


5.2.1 The Contractor shall provide to the Minister at the commencement of


Petroleum Operations of the initial term of the Exploration Period


and each extension thereof, a bank guaranty in the form of Annex E


to this Contract for the anticipated minimum expenditure set forth in


the Contract for that term or extension as adjusted and as provided in


Section 5.1.4 above. The guaranty shall be renewed each time the


initial teim is extended. Where an Eritrean bank offers competitive


rates, such guaranty shall be placed :with an Eritrean bank. Failing


that the guaranty shall be provided by a bank designated by the


Contractor and which is. acceptable' to the Mira'ster ..•••


5:2.2 The Contractor -jnay.request from timefo time that the bank guaranty


be reduced-;by., the'amount equal-1° -the value of the portion of the


minimum work program, -.which has been completed by the


Contractor. The Minister shall, within thirty (30) Days of receipt of


the Contractor’s' request,' either (a) direct the bank to reduce the


guaranty in the. amount requested or (b) notify the Contractor that


the request is..bot acceptable and state the reasons for rejecting the


request.


5.2.2.1 With regard to the initial term of the Exploration Period,


the reductions shall be made in the following manner,


amounts and circumstances:


(a) by_Dollars (S_) upon completion of


the work obligations under Section 5.1.1 (a); and


(b) by _Dollars ($ _ ) when the


Contractor has fulfilled the work obligations under


Section 5.1.1(b).


5.2.2.2 With regard to the first extension of the Exploration Period,


the reductions shall be made in the following manner,


amounts and circumstances:


(a) by _Dollars ( $_) upon completion of the


work obligations under Section 5.1.2 (a), and








32


(b) by _Dollars ($_) when the Contractor


has completed the work obligations under Section


5.1.2(b).


5.2.2.3 With regard to the second extension of the Exploration


Period, the reductions shall be made in the following


manner, amounts and circumstances:


(a) by_Dollars ($_) upon completion of the


work obligations under Section 5.1.3 (a); and


(b) by_Dollars ($_) when the Contractor


has fulfilled the work obligations under Section


5.1.3(b).


If, at the end of the initial term of the Exploration Period, any


extension thereof, or upon the date 'Of expiration or termination of


this Contract, the Contractor has .pbt performed the minimum work


obligations required during/tfie •initial term ofythe Exploration Period


or any applicable extension-thereof, the.;C6ntractdr or its guarantor


shall immediately paj the amount, corresponding to the unfulfilled


work obligations .'to. the Government^''-


The Contract' shall be -Voided-, if the Contractor does not provide the


said bank guaranty'Within the term specified in Section 5.2.1.


Discovery and Appraisal


The Contractor shall notify the Minister of a Discovery as soon as


practicable, but in no event later than forty eight (48) hours, after the


Discovery of Petroleum within the Contract Area. This notice shall


include all available details of the Discovery and particulars on any


testing program to be undertaken in order to allow the Minister to


send a representative during testing operations


Within ninety (90) Days after the date of the notice of the Discovery


under Section 5.3.1, if the Contractor considers that a Discovery


merits appraisal, the Contractor shall submit to the Minister a detailed


appraisal work program and budget to evaluate as expeditiously as


possible whether the Discovery is a Commercial Discovery.


This work program shall include an indication of the location, nature


and size of the Discovery, with a designation of the area to be


included in the evaluation, which area shall be designated as an


Appraisal Area. The appraisal work program shall also include all


Drilling, testing and evaluation to be conducted in the Appraisal Area


and the preparation of all technical and economic studies related to


recovery, treatment and transportation of Petroleum from the


Appraisal Area. The duration of this appraisal work program shall


not exceed_(_) months unless otherwise agreed in writing by


the Minister and, in any event, it shall not exceed the remaining term


of the Exploration Period as provided in Section 2 2 of this Contract.


Performance of the obligations under an appraisal work program and


budget shall not satisfy all or any part of the exploration work and


expenditure obligations for the Exploration Period set forth in


Section 5.1, as those obligations are separate and independent.


5.3.3 If the Minister does not request in writing any changes to the


appraisal work program and budget for any Appraisal Area within


thirty (30) Days after receipt thereof, the program shall be deemed


approved and adopted by the Minister.


If the Minister requests any changes to the appraisal work program


and budget for any Appraisal Area such changes shall be in


accordance with standard international petroleum industry practices.


The Contractor and the Minister shall meet within fifteen (15) Days


after the Ministers written notification--as to these requested changes


to agree on an appraisal ;wprk Vptogram and .budget. The work


program and budget shafk'be approved and adapted by the Minister


after such agreement ftas been reached;*.. If-.the Contractor does not


respond to the Minijjtefs notice-..;within thirty (30) Days of


notification^.}th^ 'Minister,s .changes' shall be deemed to have been


incorporated and accepted.by the‘Contractor.


If, after sixty"(6.0) "Days have elapsed following the Minister's


notification- :as'--to requested changes to the appraisal work program,


the Parties are unable to reach agreement, the matter may be referred


by either Party for resolution by a binding expert determination


pursuant to Section 16.2.1.


The Contractor shall involve representatives of the Ministry in the


preparation of the detailed appraisal work program and budget.


5 3 4 After adoption of the appraisal work program and budget, the


Contractor shall diligently continue to evaluate the Discovery without


undue interruptions until the Contractor determines whether the


Discovery is a Commercial Discovery.


Within thirty (30) days after the evaluation is completed, but in any


event within _ Calendar Months from the date on which


Contractor notified the Minister of a Discovery or the expiration of


the Exploration Period, whichever occurs first, the Contractor shall


notify and report to the Minister whether the Appraisal Area or any


part contains a Commercial Discovery Such report shall include all


relevant technical and economic data relating thereto.


5.3.5 If pursuant to Section 5.3.4, the Contracior notifies the Minister that


the Appraisal Area does not contain a Commercial Discovery, or fails





34


to provide the required notification and report within the time periods


set forth in that Section, the Minister shall have the option,


exercisable by notice in writing to the Contractor, to require' the


Contractor to relinquish its rights with respect to the area in which the


Discovery is located and forfeit any rights relating to production


therefrom. In the event that the Minster and the Contractor are


unable to agree upon the area to be relinquished, either Party may


refer the matter for resolution by a binding expert determination


pursuant to Section 16.2.1.


Development and Production


If the Contractor reports that the Discovery for any Appraisal Area


is a Commercial Discovery under Sections 5.3.4 and 5.3.5, the


Contractor shall comply with Article 16 of the Petroleum Regulations


within six (6) months after the completion of the appraisal work


program. . C...


The Contractor shall involve representatives of the.. Ministry in the


preparation of reports^ WOrk - 'program^'wbik’ program budget, and


all other proposals inquired to be submitted in compliance with


Article 16 of the Petfoleum Regulations:'


The Minister shall examine-the report and any work program and work


program budget..submitted pursuant to Article 16 of the Petroleum


Regulations,.. As sOo'n as possible thereafter the Minister and. the


Contractor shall"ihieet (i), to determine at such meeting, or at such


later date is tiiay be mutually agreed, the boundaries of the area to be


delineated as a Field, together with a reasonable margin surrounding


the Field consistent with petroleum industry practice, having regard to


Part II of the Petroleum Regulations (Constitution of blocks) and (ii),


to adopt a work program and work program budget for the


development of the Discovery.


5.4.2.1 The Minister may require the Contractor to provide, within


a specified time period, such further information as the


Minister may reasonably need to evaluate the development


plan for any development area.


The Minister may also request that the Contractor make


such revisions to the development plan as are reasonable to


contribute to the efficient development of Eritrean


infrastructure, develop and . utilize Eritrean personnel and


Eritrean suppliers of goods and services and secure a


production profile which is consistent with the public


interest, provided that such requested revisions shall


relate, inter alia, to Petroleum Operations and shall, inter


alia, be utilized by Contractor in Petroleum Operations.


5.4.2.2 At the meeting referred to in Section 5.4.2 the Minister


may require the Contractor to provide in writing any


change to the development plan within ninety (90)-Days


after receipt thereof


If the Minister requests any change to the development


plan, such change shall be in accordance with standard


international petroleum industry practice. The Contractor


and the Minister shall meet within fifteen (15) Days of the


Minister’s written notification as to these requested


changes to agree on a revised development plan. The plan


shall be approved and adopted by the Minister after such


agreement has been reached. If the Contractor does not


respond to the Minister’s notice within sixty (60) Days of


notification, the Minister’s change shall be deemed to have


been incorporated and accepted by the Contractor.


5.4.2.3 If the Minister and ftie ..Contractor agree upon the


boundaries of the'area to fee delineated-as.a Field and upon


the adoptiori of ai-work program apd work program budget


for the development of the'Discovery consistent with sub-


Article ife'-(c) of the Petroleum Regulations, the date upon


whidfr such agreement is reached, as reflected in a written


instrument -.signed., by both Parties, shall be the date of


commenepmerit of the Development and Production


Period. The area so determined shall, on such date,, be


•[‘automatically converted into a Field, and the Contractor


shall, as soon as is practicable, commence Development


and Production Operations in the Field according to the


work program and work program budget. Upon adoption


of the development work program and work program


budget, the annual work program and work program


budget adopted pursuant to Article 18 of the Petroleum


Regulations and this Contract shall be revised accordingly.


5.4.2.4 In the event that no agreement is reached between the


Minister and the Contractor within one hundred eighty


(180) Days from the date of submission of the report and


work program and work program budget pursuant to


Section 5.4.2 as to (i) matters relating to the adoption of


the work program and work program budget for the


development of the Discovery or (ii) the boundaries of the


area to be delineated as a Field, the Minister or the


Contractor may refer the matter for expert determination


in accordance with the provisions of Section 16.2.1. The


expert's determination shall be final and binding upon the


Government and the Contractor, and the work program


and work program budget for the development of the


Discovery and the boundaries of the area, to be delineated


3 6


as a Field, as the case may be, shall be deemed to have


been adopted and agreed as determined. Where within


sixty (60) Days of receipt of the determination of the


expert, the Contractor notifies the Minister that the


Discovery to which such work program and work


program budget relate is no longer considered to be a


Commercial Discovery, the Minister and the Contractor


shall meet to discuss the matter within thirty (30) Days of


the Contractor's notice. If no agreement is reached within


the last mentioned thirty (30) Day period, then, the


Contractor may be requested to relinquish the Discovery


area within sixty (60) Days thereof. Failing such


notification as aforementioned, the date sixty (60) Days


after the receipt of such expert determination shall be


deemed to be the date of commencement of the


Development and Production Period. The area so


determined shall on such date, be automatically converted


into a Field and... the Contractor shall commence


Development arid production Operations in the Field


according tc£ tfie'wofk program and'work program budget


so adopted,.. Upon adoption Of the development work


program, and work Iprograrfi budget as aforesaid, the


annual work program and work program budget adopted


pursuant to'Article -18 of the Petroleum Regulations and


this Confi&et':$hall be revised accordingly.


5.4.3 After the development plan has been adopted by the Parties, and


without prejudice to the provisions of Article 18 of the Petroleum


Regulations, the Contractor shall submit to the Minister for


discussion within ninety (90) Days from the commencement of the


Development and Production Period a detailed statement of the


development work program and budget for the first full Calendar


Year of the Development and Production Period and the portion of


the year preceding the first full Calendar Year .


Each annual development work program and budget submitted


pursuant to Article 18 of the Petroleum Regulations shall be


consistent with the development plan adopted or revised by the


Parties under Section 5.4.2.


5.4.4 The Contractor may submit, during the term of the Development and


Production Period, revisions to any development plan. These


revisions shall be consistent with the provisions of Section 5.4.2 and


shall be subject to the approval procedure set forth in Sections 5.4.2.


5.4.5 Notwithstanding any other provision of this Contract, in the event


that development work has not commenced within six (6) months


from the date of commencement of the Development and Production


Period, the Minister shall give the Contractor a ninety (90) Day


3 7


notice. Should the Contractor fail to commence work within the


said notice period, it shall relinquish the area comprising such


Commercial Discovery and shall forfeit any rights relating to any


production therefrom.


Management Committee


Within thirty (30) Days after the Effective Date, the Parties shall


set up a Management Committee, composed of six (6) members.


Three (3) of the members shall be appointed by the Minister and


the other three (3) by the Contractor. The chairman shall be


appointed by the Contractor during the Exploration Period.


However, upon the declaration by the Contractor that a Discovery


. is a commercial Discovery, all issues discussed in the Management


Committee pertaining to such Commercial Discovery shall be


chaired by a member appointed by the Minister. A deputy


chairman shall be appointed by the chairman.


The meetings of the Management.'iGbmmittee shall be presided over


by the chairman, or in-hfe absence by the :d!eputy chairman. The


meetings shall be -called' by the chairman;-,with at least fourteen


(14) Days’ pHorVfrofice, accompanied, where possible and


appropriatfer byVsupporting. do.6iim.ehtation. The meetings shall be


held in Eritrea, unless-otherwise agreed. The frequency of the


meetings shall be determined by the Management Committee but


shall not be less frequent than quarterly when major development


operations'ate'-contemplated or in progress, and in other cases not


less frequent./than semi-annually. The chairman shall arrange for


minutes to be taken of the meetings. The minutes shall be regarded


as approved, if no comments on the draft are made within two (2)


weeks from receipt thereof by each Party.


The Parties may appoint a reasonable number of advisors to


participate at the meetings of the Management Committee. Each


Party shall advise the other of the name such advisors, at least


fourteen (14) Days prior to the meeting of the Management


Committee. The Management Committee may establish sub¬


committees to deal with specific issues. The composition and


mandate of such sub-committees shall be determined by the


Management Committee.


All decisions and recommendations of the Management Committee


shall be taken by a majority of the members, provided that an


equal number of members from each Party are present or


represented by proxy.


The mandate of the Management Committee shall be, in general,


to secure coordination between the Parties, and to supervise the


Petroleum operations carried out by the Contractor Without


 limiting the generality of the forgoing, the Management


Committee shall:


(a) review and advise on the proposed annual work program and


budget, and any proposed changes therein;


(b) review and advise on the possible commerciality of any


Discovery, and subsequently the declaration of a Commercial


Discovery, as well as the pertinent development plan;


(c) monitor the performance of the Contract and of the work





program;


(d) advise on the delineation of any Appraisal Area;





(e) advise on the proposed delineation of a Field;


(f) review on the recruitment and Iraimhg of Eritrean nationals, and


on development and u'tiliz’atibn of Eritrean suppliers of goods


and services; ..... \ v .< \'(


(g) examine’ an&,:rf required,. .comment‘upon any reports submitted


by the Contractor ..pursuant ito Part VI of the Petroleum


Regulations; \V \


oo review .on the Contractor’s marketing of Petroleum pursuant to


Section Vllfliereof, and


a) advise on any other matter submitted to the Management





Committee by any Party.





In the event the Ministry exercises its option to take a Participating


Interest in any Field pursuant to Section VI hereof, the functions of


the Management Committee with regard to such Field shall be


assumed by the operating committee as defined in the Participation


Agreement.








SECTION VI: GOVERNMENT PARTICIPATION


Government Participation


The Government may participate in the Petroleum Operations in any


Field and acquire a Participating Interest not to exceed_(_%)


therein.


The Government may acquire such interest either directly or through


a specialized Government entity.


The Minister shall notify the Contractor in writing of the


Government's decision to participate within one hundred twenty (120)


Days after the date of adoption by the Minister of the development


plan under Section -5.4.2 for the particular Field concerned. The


notice shall specify the percentage interest to be acquired by the


Government and the identity of the Government entity that will hold


the interest if other than the Government itself.


If the Government elects to participate with respect to any particular


Field:


(a) the Government's participation shall be effective from the


date of adoption of the development plan under Section


, 5.4.2.2 for the particular Field concerned;


(b) the Government or the Government entity, whichever is


specified and the entities comprising the Contractor shall


within two months, after..the...Government participation is


effective, enter into/a Participation Agreement which, except


for the names of the-Parties, percentage's of interest and other


variables shall.he-. substantially idehticdl with the Participation


Agreement-attached hereto as Annex D and this Participation


Agreement shall not create..or be considered as a partnership


or any other similar 6ntify;


(c) the Government shall, within thirty (30) Days after the end of


the Calendar Quarter in which it elected to participate,


reimburse the Contractor, without interest, for the


Government's pro-rata share of expenditure incurred by the


Contractor in conducting Petroleum Operations in the Field


from the date of commencement of the Development and


Production Period;


(d) the Person acting as Operator shall remain as Operator of the


Field in accordance with the rights, authorities and


obligations of the Operator under the Participation


Agreement;


(e) the Government, as a Party under the Participation


Agreement, shall in respect of the Field concerned:


(i) have the right to vote in. proportion to its Participating


Interest on all decisions made under a Participation


Agreement which permit a vote by a Party;


(ii) separately take and dispose of its Participating


Interest share of all Petroleum produced and saved;


 (iii) pay its proportionate part of the expenditures incurred


in conducting Petroleum Operations in accordance


with the Participation Agreement and Accounting


Procedures attached hereto;


(iv) own a Participating Interest share in all Materials and





equipment acquired for use under the Participation


Agreement; and


(v) have the right in common with all other Parties to


cany out sole risk operations in accordance with the


provisions of the Participation Agreement; and


(f) the Minister may, upon giving the Contractor reasonable





written notice, require the Contractor to lend the Government


up to hundred percent (100%) of the funds required to pay


the Government's pro-rata share of expenditures. The loan


shall bear interest percent-(••' %). The Government shall


make repayments of the*'loan on aVquarterly basis in an


amount equal ;to: percent•:'( \%) of the difference


between, the-.grps's revenue .attributable to the Government's


Participating. Interest in the. Field and the costs and expenses,


including'royalty buf extdiidihg income taxes, attributable to


the Government's Participating Interest in the Field for


Petroleum operations. Repayments of the loan shall be


applied ifirstkd accrued and unpaid interest and the balance


shall b? "applied in reduction of the outstanding principal


balance.














SECTION VH: COST RECOVERY AND PRODUCTION SHARING


7.1 Cost Recovery


7.1.1 The Contractor shall be entitled to recover its Petroleum Operations


Costs from Petroleum produced within the Contract Area and that is


not used in Petroleum Operations, to the extent permitted by the


provisions of this Section 7 .1.


7.1.2 The Contractor shall retain and dispose, in each Calendar Year, of


that volume of Petroleum (hereinafter referred to as "Cost Oil") the


value of which is equal to the recoverable Petroleum Operations


Costs for that Calendar Year limited to an amount not exceeding the


maximum share of production determined according to the following


incremental scale:








41


 Average daily production from the Maximum share of average daily


Contract Area production available for ' cost


recovery


First 20,000 Barrels/Day %


Next 30,000 Barrels/Day %


Any volume over the first 50,000


Barrels/Day %





7.1.3 To the extent that the recoverable Petroleum Operations Costs for


any Calendar Year exceed the value of the maximum amount of


Petroleum available under Section 7.1.2 herein above, the excess


shall be carried forward for recovery in the next succeeding Calendar


Year or Calendar Years.





7.1.4 For the purpose of valuation of Cost Oil, the provisions of Section


12.1 shall apply. Q......








7.2 Production Sharing


7.2.1 The balance-;, of-Petroleum rernainihg in any Calendar Year after





deduction ofihe royalty\payiftents under Section 11.2 and after


recoverable Petroleum-Operations Costs have been satisfied to the


extent and in the..hdanfter aforesaid in Section 7.1 hereof, shall be


referred to. as "Profit’Oil" and shall be shared, taken and disposed of


between the Government and the Contractor as follows:











Increments of Profit Oil Government's Contractor's


Share Share


First 20,000 Barrels/Day % %





Next 20,000 Barrels/Day % %


Next 30,000 Barrels/Day % %





Next 30,000 Barrels/Day % %


Any volume over the first % %


100,000 Barrels/Day








7.2.2 For the purposes of this Section, Cost Oil and Profit Oil calculations


shall be done for each Calendar Quarter on a cumulative basis. To


the extent that actual quantities, prices and expenses are not known


on the date of said calculations, provisional estimates shall be made


based on the annual development work program and budget





42


 submitted to the Minister under Section 5.4.2 Within thirty (30)


Days of the end of each Calendar Quarter, adjustments shall be made


based on actual quantities, prices and expenses in relation to such


Quarter.


Within sixty (60) Days of the end of each Calendar Year, a final


calculation of Cost Oil and Profit Oil based on actual data pertaining


to that Year shall be prepared and any necessary adjustments shall be


made.


7.2 3 The Government may elect to take in kind all or any part of the total


Government's share of Profit Oil under this Section 7.2 or direct the


Contractor to lift and market all or any part of such Petroleum, all in


accordance with the provisions of Section 8.2.





7.2.4 If the Government elects not to take and receive in kind all or part of


the Government's share of Profit :Oilj the Contractor shall make


payment to the Government for thd. Government's share of Profit Oil


not taken in kind withirt .thirty (36) Days after the'end of each month.








SECTION VET: PItQptJCTION MTE AND MARKETING





8.1 Production Rate ^ \ \


8.1.1 The Contractor shill "produce Petroleum at the Maximum Economic


Efficient i Rate having consideration for generally accepted


international' petroleum industry practice and international standards


for the conservation of Petroleum resources.


8.1.2 The Contractor shall endeavor to produce in each Calendar Year the


quantity of Petroleum forecast in the quarterly report required by


Article 19 of the Petroleum Regulations. The Crude Oil shall be run


to storage facilities, maintained and operated by the Contractor in


accordance with Government regulations, in which such Crude Oil


shall be metered or otherwise measured for royalty and the other


purposes required by the Petroleum Regulations and this Contract.


8.1.3 The Contractor shall submit Petroleum production reports on a regular


basis in accordance with Article 16 of the Petroleum Regulations in a


form to be designated by the Minister.


8.2 Marketing


8 2 1 The Contractor, if so directed by the Minister, shall be obligated to


market all or any part of the Petroleum produced and saved from the


Contract Area subject to the provisions of this Contract.








43


8.2.2 Subject to Section 10.1, with respect to domestic consumption, the


Contractor shall be entitled to take and receive and freely export the


Contractor's share of Petroleum produced under this Contract.


8.2.3 Title to Petroleum produced to which the Contractor is entitled under


this Contract shall pass to the Contractor at the measurement point.


8.2.4 One hundred eighty (180) Days prior to the estimated date of


commencement of Initial Regular Production from any Field, the


Minister shall notify the Contractor in writing whether it elects to take


in kind all or any part of the royalty production under Section 11.2


and/or the Government's production share as provided under


Section VII.


This election shall be effective until the Minister elects in writing to


change its election with respect to taking in kind all or any part of the


production attributed to royalty and/or the Government's production


share as provided under Section VII, in which case the new election


shall be effective one hundred.‘eighty (180).JD

Minister gives written;' notice. Of such election;' provided, however,


that such election-'.sHall' nbt interfere With.th’e proper performance of


any sales agr.eenrient for Crude Oil produced within the Contract Area


that the Cont'fadtor has executed'prior to the notice of such election.


Failure by the Minister't.o give timely notice of its original election


shall be conclusively-. deemed to evidence the Minister's election not


to take in kind*-all*’or any part of the royalty production and/or the


Government's production share as provided under Section VII. Any


sale by the Contractor of the production attributed to royalty or the


Government's production share as provided under Section VTI shall


not be for a term of more than twelve (12) months without the


written consent of the Minister.


8.2 5 The Minister shall take, at the agreed upon point of exportation or


entry into a system for domestic consumption, regular delivery at


reasonable intervals during the period of election to take Crude Oil in


kind as provided in Section 8.2.4.


At a reasonable time prior to the date of commencement of regular


production from a Field, the Parties shall agree on procedures


covering the scheduling, storage and lifting of produced Crude Oil


from the agreed upon point of exportation or entry into a system for


domestic consumption.


8.2.6 If the Minister elects not to take and receive in kind all or any part of


the production attributed to royalty and/or the Government's


production share as provided under Section VII, the Minister may


direct the Contractor to market or itself buy such production,


whichever the Contractor shall elect to do, and the price paid to the





44


 Government for such production shall not be less than the value for


that Petroleum determined in accordance with Section 12.1. In such


event, the Contractor shall pay for the production attributed to royalty


and the Government's production share as provided under Section


VII in accordance with the provisions of Sections 7.2, 11.2 and


14.1.2.





SECTION IX: UNITIZATION





9.1 Unitization


9.1.1 If the provisions of Part VII (Unitization) of the Petroleum


Regulations become applicable, the Minister and the Contractor shall


agree upon the timetable and the modalities to enable the Minister to


discharge his duties under those Articles.


SECTION X: DOMESTLC CO^SlfkPTION





10.1 Domestic Consumption .....





10.1.1 The Minister require the .Contractor, by written notice given one


hundred eighty'(180) Days in advance, to supply Crude Oil to the


State to meet the State's domestic consumption needs. Such Cmde


Oil shall be supph^d.'frbm the Cmde Oil to which the Contractor is


otherwise entitled under this Contract.


10.1.2 The maximum amount of Cmde Oil that the Contractor shall be


obligated to supply to the State to meet its domestic consumption


needs under Section 10.1.1 shall be equal to the difference between.


(a) the total domestic consumption needs multiplied by a


fraction the numerator of which is the total Cmde Oil


production from the Contract Area and the denominator is


the total Cmde Oil production in the Territory of Eritrea;


and





(b) the amount of Cmde Oil from the Contract Area to which


the Government is entitled under this Contract, including


royalties in kind, Government participation production and


the Government's production share as provided under


Section VII.


Such determination shall be made on a quarterly basis.





10.1.3 If the Contractor supplies Cmde Oil for domestic consumption, the


price paid to the Contractor shall be calculated in accordance with


Section 12.1 and paid in Dollars or any other currencies mutually


agreed upon.


4 5





 10.1.4 The Contractor may comply with Section 10.1.1, upon the


written consent of the Minister, by importing Crude Oil and. .


exporting the same amount, with adjustments to-be made in price


and volume to reflect transportation costs, differences in quality,


gravity and the terms of the sale.








SECTION XI: RENTALS, ROYALTIES AND BONUSES


11.1 Annual Rentals


11.1.1 The Contractor shall pay to the Minister during the term of the


. Exploration Period, the following annual rentals for all unsurrendered


parts of the Contract Area that have not been designated as a Field:


(a) during the initial term of the Exploration Period_


Dollars ($_) per square kilometer,


(b) during the first \ extension to \tBe-: - Exploration Period


_Dotfars ’•{$' ) per square, kilometer;


(c) diiririg Uhe second‘extension to the Exploration Period


'•'Dollars ($' ') per square kilometer; and


(d) during' any‘-other period or extension to the Exploration


PeriodDollars ($_) per square kilometer.


11.1.2 The Contractor shall pay to the Minister during the term of the


Development and Production Period an annual rental of_Dollars


($_) per square kilometer for each part of the Contract Area that is


designated as a Field.


11.1.3 The first annual rental payment shall be made within thirty (30) Days


after the Effective Date of this Contract. All subsequent annual rental


payments shall be made within thirty (30) Days after the anniversary


of the Effective Date and shall be calculated on the basis of the length


of time during the year that any part of the Contract Area was held


under the Exploration Period or the Development and Production


Period. If, during any year, a change occurs with regard to the


Contract Area that results in an increase or decrease in the annual


rental payment due, the payment for the following year shall be


adjusted to compensate for the difference.

















46


 11.2 Royalties





11.2.1 The Contractor shall pay, within ten (10) Days after the end of each


Calendar Quarter, to the Minister, a royalty at a rate depending on the


total daily production in a Field of all Crude Oil and Natural Gas


produced and saved and not used in Petroleum Operations, and


determined according to the following incremental scale:














Average Crude Oil Production from a Royalty


Field


First 10,000 Barrels/Day %





Between 10,000 and including


20,000 Barrels/Day •• %





Greater than 20,000 B^rrels/D^y *'•








Average Natural'Gas Production Royalty


from a Field .•••' • \ \ ;


First 50 million cubic'feet/Day %





Between.5ft aini,. including 100


million ciibicfeet/Day %





Greater than 100 million cubic


feet/Day %








11.2.2 The Minister may elect to take all or any part of the royalty in kind


from any Field in accordance with the provisions of Section 8.2 and,





unless the Minister elects to take royalty in kind as provided in this


Section, the royalty shall be paid pursuant to Section 14.1.2.


The royalty taken in cash shall be valued at the agreed upon point of


11.2.3


exportation or entry into a system for domestic consumption, in


accordance with the appropriate provisions of Section 12.1.





11.2.4 The title to the production attributed to royalty not taken in kind


shall pass to the Contractor at the measurement point.




















47


 11.3 Production Bonuses





11.3.1 The Contractor shall pay to the Minister, the following sums when


production of Crude Oil from the Contract Area attains the following


levels for the specified periods of time:


(a) _Dollars (S_) after daily production averages


_( ) Barrels or more per Day for a period of


_(__) consecutive Days; and


(b) _Dollars ($_) after daily production averages


_(_) Barrels or more per Day for a period of


_( ) consecutive Days; and


(c) In the event the above two (2) levels are attained within the


same (_) Day period the bonus payment shall be the


aggregate of the bonuses due -in (a) and (b) above.


11.3.2 The payments under Section-J'l j'.i snail be made within ( )


Days after the last Day. of-the applicable '(>■ ,)’Day period.


11.4 Signature Bontis. %’


11.4.1 The Contractor shall pay to the Minister, within thirty (30) Days


of the Effective DateXtfe siim of , Dollars ($_)


as a signature bonus. \


SECTION XH: VALUATION AND MEASUREMENT


12.1 Valuation


12.1.1 The value of Crude Oil for all purposes shall be:


(a) if the Crude Oil is sold by the Contractor to third parties in


arm's length transactions, the net realized price (i.e., after


deducting commissions and brokerages) for that sale, at the


FOB. point of exportation, or the point of entry into a


system for domestic consumption;


(b) where Crude Oil is sold by the Contractor other than to third


parties in arm's length transactions or is relevantly


appropriated for domestic consumption, as provided herein,


without being disposed of, that Crude Oil shall be valued at


the following applicable price:


(i) the average per unit price for the Calendar Month of


the tender date, net of commissions and brokerages,


at the F O B. point of exportation paid in arm’s





48


 length transactions of sale of Crude Oil of a similar


quality, grade and quantity as published in


internationally accepted oil publications adjusted'for


quality, grade, quantity, transportation costs and any


special circumstances at the most recent differential;


and


(ii) provided that commissions or brokerages incurred in


connection with sales to third parties, if any, shall not


exceed the customary and prevailing rate.


(c) If the Minister and the Contractor cannot reach agreement


on the value of Crude Oil within thirty (30) Days, such


determination shall be made by a binding expert


determination as provided in Section 16.2.1.


Pending the determination, d.f .the value of Crude Oil for a


given period, the value :of Crude Oil, determined for the


preceding Calendar Quarter will be provisionally applied to


make calculation;; and payment.-uiitil ttie applicable value for


that period..-is - finally determined.' Any adjustment to


provisional calculation-.and - .paiyment, if necessary, will be


made..within thirty (30) Days after such applicable value is


finally determined. \ v


12.1.2 The value pf.Naturkl‘Gas for all purposes shall be.





(a) where Natural Gas is sold by the Contractor to third parties in





arm's-length transactions, the net realized price obtained for


such Natural Gas at the point where title and risk pass to the


buyer; and


(b) where Natural Gas is sold by the Contractor other than to


third parties in arm's length transactions or is sold to the


Government, that Natural Gas shall be valued at a price and in


a currency to be determined by agreement between the


Minister and the Contractor.


12.1.3 For the purposes of this Section 12.1;





(a) "relevantly appropriated" means appropriated as Domestic





Consumption pursuant to Section X; and


(b) a sale of Petroleum is a sale at "arm's length" if the following


conditions are satisfied:


(i) the price is the sole consideration for the sale;








49


 (ii) the terms of the sale are not affected by any commercial


relationship, other than that created by the contract of


sale itself, between the seller or an Affiliate and the buyer


or an Affiliate; and


(iii) the seller or an Affiliate does not have, directly or


indirectly, an interest in the subsequent resale or disposal


of the Petroleum or any product derived therefrom.








12.2 Measurement


12.2.1 The Contractor and the Minister shall determine the point at which





production shall be measured in accordance with the provisions of


Article 14 of the Petroleum Regulations.








SECTION XIII: NATTJjfcAt, GAS v


Non-associated Natural Gas


13.1


13.1.1 If Non-associated Natural. Gas is discovered, the Contractor and the


Minister shalf engage .iii good'faith discussions to determine whether


the Natural Gas . Discovery should be appraised with a view to its


eventual development and production. Such discussions shall take


into consideraticynv'among other things, the following factors:





(a) priority uses for Natural Gas will be (i) its use in Petroleum


Operations, (ii) its utilization in Eritrea, and (iii) its sale for


export projects, depending on the existence or potential of the


respective markets;





(b) the quality, minimum quantities and costs of facilities required


to produce, develop, transport and market the Natural Gas;


(c) the pricing of the Natural Gas for domestic utilization at levels


that will ensure the economic viability of the project and the


economic utilization of the Natural Gas for each particular


use, including reference to the value of the energy it may


displace; and


(d) the willingness of the Government to enter into long-term


sales arrangements with adequate safeguards for and from the


Contractor in order to promote and develop the use of


indigenous resources of Natural Gas in Eritrea, as well as to


develop, on a timely basis, the necessary downstream


components of the project.





50


 13.1.2 If the Contractor, after discussions with the Minister under Section


13.1.1, considers that the Non-associated Natural Gas Discovery


merits appraisal, the Contractor shall proceed with the appraisal


program as stipulated under Section 5.3 and, if necessary, the


provisions of Section 2.2.5 shall apply.





13.1.3 If the Contractor and the Minister agree, after discussions under


Section 13.1.1 and the completion of the appraisal program, that the


Non-associated Natural Gas discovery constitutes a Commercial


Discovery, the Contractor shall proceed with its development and


production through submission of a development plan in accordance


with the provisions of Section 5.4. The Contractor and the Minister


shall enter into. good faith negotiations for., detailed separate


agreements to govern the development, processing, utilization and


disposition or sale of the Natural Gas concerned.


For the purpose of expediting the-..execution of a domestic Gas


development project, a Gas development advisory committee shall be


established with representatives'of the Minister-arid.the Contractor to


co-ordinate all upstream ^d--downstream components of the project


and facilitate its evaluation and implementation.


Unless otheibyise agreed, the adoption of the relevant development


plan under Section 5.4\ Shalfbernade only once all agreements for the


disposition or sajle-_dr.j[tie:-Natural Gas concerned have been concluded.


To the maximum extent possible, the Contractor shall involve


representatives of the Government in the preparation of the


development plan specified above.


13.1A If the Contractor elects not to develop a Non-associated Natural Gas


Discovery which has been appraised and found to be of potential


commercial interest in accordance with the provisions of Section


13.1.3, the Government shall have the right to proceed with the


development and production of the Discovery at its sole risk, cost and


expense. In such a case the Government shall reimburse the


Contractor the certified costs and expenses directly attributable to the


appraisal of such Discovery provided, however, that.


(a) the Contractor surrenders all its rights under this Contract in


respect of the area corresponding to the Non-associated


Natural Gas Discovery;


(b) the appraisal program was approved in writing by the


Minister;


(c) the Contractor and the Government agree, with the assistance


of specialized third parties, if and when necessary, that


sufficient economically recoverable gas reserves have been


51


proved to support the demand for and the economic viability


of a pre-identified domestic Natural Gas project for a period


of at least twenty five (25) years under the pricing principles


specified under Section 13.1 and taking into account the


reimbursement included herein; and


(d) such reimbursement to the Contractor shall be made within


years, without interest, in equal quarterly


installments starting six (6) months after the date of adoption


by the Minister of the development plan for the particular


Natural Gas Discovery concerned. The Government may


elect to make reimbursements either in cash or in Crude Oil


valued pursuant to the provisions of Section 12.1.


13.1.5 If the Contractor decides, after discussions under Section 13.1.1 and


the completion of the appraisal program, that the Non-associated


Natural Gas Discovery is not a- Commercial Discovery, the


Government shall have the right to proceed with further appraisal and


development of reservoirs-

Discovery at its sole .risk,ycosrf and expensed.The-'Government may


develop, produce,dake/.process and utilize dr sell the Non-associated


Natural Gas without" compensation-to ’the Contractor provided,


however, that: \


(a) the Govenptenf. shall bear all costs for any new fixtures and


installation^., required for development, production,


transportation, processing and utilization thereof;


(b) the production of Natural Gas shall not materially interfere


with other Petroleum Operations; and


(c) the rights of the Contractor under this Contract in respect of


reservoirs other than the identified Non-associated Natural


Gas reservoirs shall remain unaffected.


13.1.6 If, after good faith discussions with the Minister under Section


13.1.1, the Contractor decides that there is no merit in appraising the


Non-associated Natural Gas Discovery, the Contractor shall, within a


period of six (6) months, submit to the Minister, a report justifying its


decision on the basis of at least the following factors .


(a) evaluation of possible reserves taking into account test results


of the Discovery Well and any other relevant information;


(b) market alternatives considered for the Non-associated


Natural Gas;


(c) investment and cost estimates, and





52


 (d) economic reserves under different price assumptions.


If the Contractor fails to comply with these requirements within a





period of one (1) year after the date of the Discovery, the Minister


may at his discretion terminate the rights of the Contractor in respect


of the area, corresponding to the Non-associated Natural Gas


Discovery.


13.1.7 Where the Contractor decides after discussions under Section 13.1.1





and completion of the appraisal program, that the Non-associated


Natural Gas Discovery is not a Commercial Discovery, the


Contractor shall inform the Minister of its decision and where the


latter agrees with said decision, the provisions of Section 13.1.5


above shall apply. If, however, the Minister disagrees with the


decision of the Contractor the Minister may refer the question for


resolution by an expert determination as provided in Section 16.2.1.


13.2 Associated Natural Gas


13.2.1 Associated Natural Gas' not required for.use. iit Petroleum Operations





and the development,.production, processing and utilization or sale of


which the Contractor- concludes.is riot economical, shall be returned


to the subsurface structure.. Cflie Contractor shall, nonetheless, have


the right to flare sucjf. Natural Gas in accordance with generally


accepted international, ^petroleum industiy practice, provided the


Contractor demonstrates that the flaring is required for technical and


economic i*easori$-2nd the Minister approves it.


If the Contractor determines to flare such Natural Gas, the


Government shall have the right to take such gas at no cost except to


compensate the Contractor for the additional costs to deliver the


Natural Gas to the Government.


13.2.2 If the Contractor and the Minister agree that the Associated Natural


Gas that is not required for Petroleum Operations may be


economically processed and utilized or sold other than in gas


recycling, reservoir pressure maintenance, gas lift or secondary


recovery operations, the Contractor and the Minister shall enter into


good faith negotiations for a separate agreement to govern the


processing, utilization and disposition or sale of the Natural Gas


concerned.








13.3 Other Provisions


13.3 .1 The development and production of Natural Gas, whether associated





or non-associated, shall be subject to this Contract and the


Accounting Procedure attached hereto as Annex C as well as any





53


 special agreement entered into between the Minister and the


Contractor pursuant to the provisions of Sections 13.1 and 13.2.





However, the Minister and the Contractor may engage in good faith


negotiations to modify the provisions of Section VII on cost recovery


and production sharing in respect of Natural Gas, if the Minister


determines that special circumstances relating to Natural Gas


development and production which warrant such modification exist.





13.3.2 Except as otherwise agreed, the provisions of this Contract shall


apply mutatis mutandis to the production of Natural Gas, it being


agreed and understood that six thousand (6,000) cubic feet of Natural


Gas at a temperature of fifteen point fifty six degrees Celsius


(15.56?C) and standard atmospheric pressure of 1.01325 bar shall be


deemed to be equivalent to one (1) Barrel of Crude Oil. Natural Gas


liquids shall be treated as Crude Oil.


In the event that a Non-assopiated..- Natural Gas Discovery is





produced, the Petroleum Opefati'ofts'Costs incurred by the Contractor


and directly attributable" t'p'-the'Discovejy sM ’be’only recovered in


accordance with Section. VII ffompart of the production from that


Discovery, ,.unles>.. 4n agreement made pursuant to this Section


otherwise provides. •


13.3.3 The value of Natural i'Gas for all purposes shall be determined in


accordance with the provisions of Section 12.1.








SECTION XIV: FINANCIAL AND FISCAL MATTERS AND


ACCOUNTING





14.1 Finances


14.1.1 The Contractor shall provide all funds necessary to conduct


Petroleum Operations, shall bear the sole financial risk in carrying out


such Petroleum Operations and shall, therefore, have an economic


14.1.2 interest in the development and production of Petroleum from the


Contract Area, except as otherwise provided in this Contract.


(a) All payments under this Contract by the Contractor to the


Government shall be made in Dollars at a bank to be


designated by the Minister or, at the Contractor’s election,


such other currency as is acceptable to the Minister.


(b) All payments under this Contract by the Government to the


Contractor shall be in Dollars at a bank to be designated by


the Contractor or, at the Government's election, such other


currency as is acceptable to the Contractor.





54


 (c) Except as otherwise expressly provided herein or stipulated in


any applicable legislation, all payments required to be made


pursuant to this Contract shall be made within thirty (30)


Days following the end of the Calendar Month in which the


obligation to make such payment occurs. After that point in


time any delayed payments shall bear interest at_percent


(_%) Per year.


14.1.3 Charges for services requested by the Contractor and actually


rendered by the Government or its administrative or political


subdivisions shall be made at the generally applicable rates for such


14.2 services.





Taxation


14.2.1 The Contractor and the Subcontractors shall be subject to, and


comply with, all income tax laws., ajkl regulations of Eritrea. The


Contractor shall be answerable, for the-payment of tax obligations of


its foreign Subcontractorst’in'accordance with the Petroleum Tax


Proclamation. . •'* ) \ V’


Unless otherwise-agreed by the Pkrtifes, the provisions of Section


14.1.2(a) shaifapply to income tax-payments.


14.2.2 The salaries ap.d.;Qther 'benefits in cash or in kind of expatriate


employees..of;.the‘Contractor and the Subcontractors derived from


activities:* attendant to performance under this Contract shall be


14.3 subject to'thfe Petroleum Proclamation.


Foreign Exchange Control





14.3.1 The Contractor shall comply with the procedures and formalities


required by legislation and regulations relating to foreign exchange


in force from time to time in Eritrea, provided, however, that the


Contractor shall have the right to:





(a) open and keep one or more transferable or non-transferable


local currency accounts with the Commercial Bank of Eritrea.


Such local currency accounts shall be credited with:


(i) the proceeds of the conversion into local currency


pursuant to paragraph (c) below of funds deposited in


the external accounts referred to in paragraph (b)


below; and


(ii) amounts received in local currency, subject to


approval of the Bank of Eritrea as to the source of


origin;








5 5


 (b) open and keep foreign currency account with the Commercial


Bank of Eritrea and freely dispose of the sums deposited


therein. Such account shall be credited only with sums


deposited in convertible currencies;


(c) convert to local currency the foreign convertible currencies





acceptable to Eritrean banks at rates of exchange quoted by


commercial banks operating in Eritrea. Such rates shall not


be less favorable to the Contractor than the effective rate


applicable for similar transactions undertaken by any private


or State enterprise on the date of the transaction;


(d) open and freely maintain foreign bank accounts outside


Eritrea. Said bank accounts may be credited with funds from


any source, except that such accounts shall not be credited


with the proceeds of the sale of local currency without the


prior approval of the Bank .of Eritrea. Except for funds


needed by the Contractor: to’"-.discharge its obligations in


Eritrea under this Contract'the Contractor shall have the right


to retain, abroad., -.all ;proceeds ..and ';paynients under this


Contract, received-in said bank'-accounts, including but not


limited tq..th’£ proceeds of sales;; of'Petroleum hereunder, and


to dispose 'freely of-tfie/' same without any obligation to


repatriate the sanie‘orany part thereof to Eritrea;


(e) pay difeefry\ foreign Subcontractors outside Eritrea for


purchases..-6f goods and services necessary to carry out


Petroleum Operations hereunder;


(f) freely repatriate abroad all proceeds from Contractor's





Petroleum Operations within Eritrea; and


(g) pay directly outside of Eritrea from its offices abroad for


purchases or services for Petroleum Operations hereunder,


provided, however, that no such payments shall be made to


Eritrean citizens (whether natural or juridical) or to firms


using Eritrea as their main base of operations contrary to the


laws of Eritrea.


The foreign Subcontractors of the Contractor shall have the


same rights and obligations specified above as the Contractor.





14.3.2 Any foreign Subcontractor of the Contractor or of any of its


Subcontractors shall be entitled to receive, outside Eritrea, the whole


or any part of their compensation provided, however, that such


foreign Subcontractor shall be required to bring into Eritrea such


freely convertible currencies to meet payments of Eritrean taxes and


other expenses.





56


 All expatriate personnel of the Contractor, or of any of its


Subcontractors, shall be entitled to receive, outside Eritrea, the


whole or any part of their remuneration, provided that they shall be


required to bring into Eritrea such freely convertible currencies to


meet their living and other expenses.





14.3.3 The payment of principal, interest and/or costs due on funds and loans


in foreign currency shall not be made out of funds deposited in the


14.3.4 accounts opened and kept under Section 14.3.1 (a) above.


The Contractor and the Subcontractors shall each be required, within


thirty (30) Days after the end of each Calendar Quarter to submit to


the Bank of Eritrea with a copy to the Minister, a summary of all


currency received, imported, remitted and maintained abroad


14.3.5 pursuant to Section 14.3.1 during the relevant Quarter. Such


summary shall be in the form required by the Bank of Eritrea.


Except as otherwise provided hgrbin,.-;expatriate employees of the





Contractor and the Subcontractors "shall comply , with the applicable


14.4 foreign exchange legislation and” regulations:-.. V'"


Accounting-.


14.4.1 The Contractor shall keep Complete financial accounts and records in





accordance with t.he; Accounting Procedure Annex C hereto.


14.4.2 The Minister shali' have the right to audit the Contractor's books, in


the manner-provided for in the Accounting Procedure Annex C


hereto.





15.1


SECTION XV: IMPORTS AND EXPORTS


Imports





15.1.1 Subject to the local purchase obligations of Section 3.5 and pursuant


to Article 21 of the Petroleum Proclamation, the Contractor and each


Subcontractor shall be entitled to import, into Eritrea, any and all


drilling, geological, geophysical, production, treating, processing,


transportation and other machinery and equipment necessary for


Petroleum Operations, including aircraft, vessels, vehicles and other


transportation equipment and parts therefor (other than sedan cars


and fuel therefor), fuels, chemicals, lubricants, films, seismic tapes,


house trailers, office trailers, disassembled prefabricated structures,


communication equipment, office equipment, furniture, appliances,


and Materials; and household equipment, furnishings, appliances, and


Materials; and other Materials necessary for Petroleum Operations


free of import taxes, charges, duties, levies and imposts of any kind,


57





 provided, however, that this shall not relieve the Contractor and the


Subcontractor from paying generally applicable charges to the


Government for services requested and actually rendered by any


appropriate Government agency.


15.1.2 Except as specified in this Contract and the Petroleum Proclamation,


all other imports by the Contractor, each Subcontractor and their


employees shall be subject to all generally applicable import duties


and taxes of Eritrea.


Any expatriate employee of the Contractor and Subcontractors may,


15.1.3


in accordance with prevailing regulations, import household goods


and personal effects including one (1) sedan car per employee within


six (6) months of his arrival, free of import taxes, charges, duties,


levies and imposts of any kind, provided, however, that such


properties are imported for the sole use of the employee and his


family.


15.1.4 The exemptiqn provided under'thjs'Section XV shall not apply to any


imported items of the same-. or substantially, th^satne’ kind and quality


manufactured locally., and-- are available.. fior:- purchase and timely


delivery at theVCphtractor’s operating-, base in Eritrea, at a price


competitive.to the cost of the imported item.


15.1.5 The Government-,. .reseh/es the right to inspect the records,


documentatioa-or-'physical item or items for which an exemption is or


has been provided-under Section 15.1.4 to determine that such item


or items are.being or have been imported solely for the purpose for


which the exemption was granted.


15.2 Exports





15.2.1 All items imported under Section 15.1 and taken out from Eritrea


shall be exempted from export duties and other taxes and duties


levied on exports, provided, however, that if these items are disposed


of within Eritrea, the Contractor, Subcontractors and expatriate


employees, as the case may be, shall pay customs duties and taxes in


accordance with the applicable laws


15.2.2 The Contractor may export from Eritrea exempt of all export duties


and other taxes levied on exports, the Petroleum produced from the


Contract Area to which the Contractor is entitled in accordance with


the provisions of this Contract.


15.2.3 Notwithstanding any other provision of this Contract, the Contractor


shall not make shipments of Petroleum produced from Petroleum


Operations in Eritrea to or through countries whose export


destinations are proscribed by the State.





58


 SECTION XVI: GOVERNING LAW AND DISPUTES


16.1 Governing Law


16.1.1 Without prejudice to Section 16:2 below, this Contract shall be


construed under, governed by and interpreted in accordance with the


laws of the State of Eritrea as of the Effective Date; provided that the


16 1.2 State’s sovereign right to legislate as it sees fit is no way restricted


by this provision.


The Contractor undertakes to abide by all the laws and regulations in


force in Eritrea.


16.1.3 In the event after the Effective Date of this Contract the economic


benefits to be derived by a Party from the Petroleum Operations


under this Contract are substantially, affected by, the promulgation of


new laws and/or regulations of Eritrea and ff-.ftie.affected Party so


requests, the Parties shall agree'to makp fhe -necessary adjustments to


16.2 the relevant provisions. 6f this Contract, in order to ensure that the


affected Party is..-restored to thef same economic condition it would


have been iri-if.such change in the Applicable laws had not taken place.


Resolution of Disputes .





16.2.1 The Parties agree'that in the event a dispute arises between them on


the matters'addressed in Sections 5.1.6, 5.3.3, 5.4.2.3, 12.1.1 and


13.1.7 of this Contract, the issues in dispute shall be submitted for


16.2.2 international expert determination in accordance with the Rules of


Technical Expertise of the International Chamber of Commerce.


Except as otherwise provided in this Contract, if, during the term of


this Contract or thereafter, any difference or dispute arises with


respect,to the construction, meaning or effect of this Contract or


arising out of or related or in connection with this Contract or


concerning the rights and obligations hereunder, which difference or


dispute cannot be mutually resolved by the Parties within ninety (90)


Days, either Party shall have the right to submit the difference or


dispute to a formal settlement process under this Section 16.2.2.


16.2.2.1 The difference or dispute referred to under Section 16.2.2 shall be


finally settled by arbitration in accordance with the Arbitration Rules


of the United Nations Commission on International Trade Law as at


16.2.2.2 present in force.


This arbitration, including the rendering of the award, shall take place


in Asmara, Eritrea, and shall be in English. The decision of the


majority of the arbitrators shall be final and binding upon the Parties.


59





 Any decision of the arbitrators may be presented for enforcement


before any court having local and material jurisdiction.


16.2.2.3 The number of arbitrators shall be three (3) and they shall be


appointed as follows:


(a) each Party shall appoint one (1) arbitrator and notify the


other Party of such appointment and those two (2) arbitrators


shall appoint the third arbitrator. The third arbitrator shall be


fluent in English, of a nationality different from that of either


of the Parties, and shall serve as the President of the


Arbitration Tribunal;


(b) if any of the arbitrators shall not have been appointed within


thirty (30) Days after receipt of written request to do so,


either Party may request, in ^writing,_of_to


appoint the arbitrator or arbitrators not yet appointed and to


designate an arbitrator. jo..te the of the Arbitration


Tribunal. The ....... y .shall forthwith'.‘sehd’a copy of that


request to the Other-Party. V


The% ..’-. V shall comply with the request within thirty (30)


Days fr6m the receipt-, thereof or such longer period as the


Parties may


The" '- shall promptly notify the Parties of any


appointment or designation made by him pursuant to the


aforesaid request. The experts’ fees and expenses, and the


costs associated with an appointment, if any, made by the


_ of _, shall be borne equally by the


Government and the Contractor; and





(c) if the arbitrator fails or is unable to act, his successor shall be


appointed in the same manner as the arbitrator whom he


succeeds.


16.3 Force Majeure


16.3.1 Lack of compliance by any of the Parties with any obligation or


condition stipulated in this Contract shall, except for the payment of


monies due, shall be excused during the time and to the extent that


the said non-compliance is caused by Force Majeure.


An event shall be considered Force Majeure if it meets the following


conditions.


16.3.1.1 It has the effect of temporarily or permanently





preventing either of the Parties from carrying out its


obligations under the Contract; and


6 0


 16.3.1.2 It is:





- either enforceable and beyond the control of the Party which


declares Force Majeure and is not the result of its


negligence or omission; or


- unavoidable and beyond the control of the Party which


declares Force Majeure and is not the result of its


negligence or omission.





A Force Majeure occurrence includes, without limitation, riots,


strikes, wars (declared or undeclared), insurrections, rebellions,


terrorist acts, civil disturbances, orders of any Governmental


authority, whether such authority be actual or assumed, natural


phenomena or calamities or "acts of God"; provided, however, that


the inability to obtain equipment, supplies, or fuel shall not be a cause


of Force Majeure. . • • . ' v \ *


Failure to effect paymeni.of any sums-due shall never be exonerated





by the defense of For-ce.Majeure. .. '•


16.3.2 If either Party.-Cannot compfy.with any obligation or condition herein


stipulated because of Force Majeure it shall notify the other Party in


writing as promptly-possible (in any case not later than fourteen


(14) Days .after. the-: event) giving the reason for its non-compliance,


particulars, of /the Force Majeure and the obligation or condition


affected. Tlie Party affected by the Force Majeure shall keep the other


Party informed from time to time of the evolution of the Force


Majeure occurrence and shall promptly notify the other as soon as the/


Force Majeure has been removed and no longer prevents it from


complying with its obligation or condition and shall thereafter resume


compliance with such obligation or condition as soon as possible.


16.3.3 Any period during which compliance with any contractual obligation


or condition is rendered impossible because of Force Majeure shall


be added to the period laid down in this Contract for compliance with


such obligation or condition.





16.3.4 The Party which has given the notice of Force Majeure shall do all


that is reasonably within its power to remove such cause, and shall


keep the other Party informed of its efforts in that direction, except


that no Party shall be required to settle any labor dispute against its


best judgment.





16.3.5 Where a Force Majeure situation continues for more than ninety (90)


Days the Parties shall meet to review the situation and its implications


for Petroleum Operations and to discuss the appropriate course of


action in the circumstances.


61


 SECTION XVII: GENERAL





17.1 Confidentiality


17.1.1 Subject to the provisions of Article 24 of the Petroleum Regulations,


all information and data made available or obtained under this


Contract shall be and remain confidential among the Parties during the


term of this Contract and for two years thereafter, and a Party shall


not, , during such period, without prior written consent of all Parties


which consent shall not be unreasonably withheld, disclose such


information and data to any entity which is not a Party to this


Contract except that a Party may disclose, without having obtained


prior written consent, such information and data, but only insofar as is


reasonably required to:


(a) Affiliates; . .. \





(b) a Government -agency, .of competent'-jurisdiction;


(c) an established stock exchange;''-





(d) a lending institution'-, in connection with a loan to the


disclosingParty;


(e) a .contractor of a Party in connection with technical studies


pertaining to reserves underlying the Contract Area or a


portion thereof;


(f) an entity which is engaged with a Party in good faith


negotiations for the acquisition of all or a part of the


Participating Interest of such Party; and


(g) legal counsel, accountants, other professional consultants,


underwriters, lenders, and agents.





In each case, the Party shall obtain a written commitment from the


Party to whom the disclosure is made guaranteeing that such


information and data will be held in strict confidence. This


requirement is waived in the case of a stock exchange as in (c) above.





17.1.2 Notwithstanding the provisions of Section 17.1.1, the Minister may


use any information supplied, for the purpose of preparing and


publishing any reports and returns required by law, and for the


purpose of preparing and publishing reports and surveys of a general


nature.











62


 17.1.3 The Minister may publish any information of a geological, scientific


or technical nature which relates to a surrendered area at any time


after the surrender and in any other case, three (3) years after the


information was received unless the Minister determines, after


representations by the Contractor, that a longer period shall apply.


17.2 Waiver


17.2.1 Performance of any condition or obligation to be performed


hereunder shall not be deemed to have been waived or postponed


except by an instrument in writing signed by the Party which is


claimed to have granted such waiver or postponement.


No waiver by any Party of any one or more obligations or defaults by


any other Party in the performance of this Contract shall operate or be


construed as a waiver of any other obligations or defaults whether of


a like or of a different character. •.





17.3 Notices \.V


17.3.1 Any and all -notice's,- requests,..demahds'and other communications


required or perniitted to be made pr oven under this Contract shall be


in writing and shall be*, deemed' to have been duly made or given if


delivered by hapd-fjS‘aft. authorized representative of the Party for


whom intended,(registered mail, cable, telex, or facsimile as follows:


(a) If to the Ministry: Minister of Energy and Mines


Government of the State of Eritrea


Facsimile 291-1-127652


P.O. Box 5285, Asmara, Eritrea


(b) If to the Contractor : __


Facsimile:_


P O. Box_


Either Party may designate, in writing, in conformance with the


above, another address at which it should receive all future notices,


requests, demands and other communications required or permitted


to be made or given under this Contract.


17 3.2 All notices, requests, demands and other communications required or


permitted to be made or given under this Contract shall be in English.


All reports, agreements or other documents produced by the


Contractor in connection with this Contract shall be in English


A notice shall be effective upon receipt.


17.3.3


63





17.4 Headings and Amendments





17.4.1 Headings are inserted in this Contract for convenience only and shall


not affect the construction or interpretation hereof.


17.4.2 This Contract shall not be amended, modified or supplemented except


by an instrument in writing signed by the Parties.


SIGNED on the day and year first above written.





For the STATE of ERITREA For__ Petroleum Company


By:_ By:_





The Minister of Energy and Mines Title: ._











ANNEX A: COORDINATES OF THE CONTRACT AREA








ANNEX B: MAP OF THE CONTRACT AREA















































64


 ANNEX C: ACCOUNTING PROCEDURE





PARAGRAPH C. 1: GENERAL PROVISIONS


C.1.1 Purpose





C. 1.1.1 To classify expenditures, define Allowable Petroleum Operations


Expenditures, and prescribe the manner in which the Contractor's


accounts shall be prepared and approved. This Accounting Procedure


is without prejudice as to whether the Contractor may deduct the


said amounts in computing its net income from Petroleum Operations


for purposes of the Petroleum Tax Proclamation.


The Allowable Petroleum Operations Expenditures shall reflect the





actual costs, direct and indirect, of carrying out the Petroleum


Operations. There shall never be any profit element in any of the


Allowable Petroleum Operations •^JCp.femlitures. Consequently, the


Accounting Procedure shall ne^er ,;rejgardless.o£any-specific wording,


be construed in such a.waiy that ahy element df profit is incorporated


in the Allowable Petroleum'- Operations.. Expenditures. Insofar as its


contractual relationships* with ...the.Gbvernment are concerned all


profit elements '•for' the Contractor-''may be derived solely from


Petroleum Operations unden-thii? Contract.





Accounts and records ,kre required for several purposes, including,


but not limited to:


(a) reporting to the Minister expenditures and receipts;


(b) reporting actual expenditures to the Minister for





comparison with minimum exploration obligations;


(c) calculating royalties;


(d) calculating cost recoveiy and production sharing as





set forth in the relevant Sections of the Contract;


(e) calculating income taxes;





(f) preparation of the annual balance sheet and profit and


loss account; and


(g) any other requirements under the Contract.











C 1.1.2 The Contractor may act as agent for the Government or for any other


party in a number of matters In such cases, the Minister shall


65


separately determine, as appropriate, in consultation with the


Contractor, the requisite Accounting Procedures. Such cases may


include, but not be limited to, sales of Petroleum on behalf of the


Government.


C 1.2 Definitions


For purposes of this Accounting Procedure the terms used herein


which are defined in the Contract shall have the same meaning when


used in this Accounting Procedure.


"The Contract" means the Contract for Petroleum Exploration,


Development and Production in Blocks_by and between


the Government of Eritrea and_Company dated,_, of


which this Accounting Procedure forms a part.


"Material" means personal property (including , but not limited to,


equipment and supplies) acquired.and field for use in Petroleum


Operations. .**’ \ •••.. \ ...


"Parent Company "means \ and its successors and


assignees. . V‘-


C.l 3 Inconsistency


In the event of.atiy inconsistency or conflict between the provisions


of this Accounting"’Procedure and the other provisions of the


Contract, the'other provisions of the Contract shall prevail.


C.1.4 Accounting Records and Reports


C. 1.4.1 During the term of the Contract, the Contractor


shall maintain in Asmara or such other location in


Eritrea designated by the Contractor, complete


accounts, books and records of all revenues, costs


and expenses related to Petroleum Operations


hereunder in accordance with generally accepted


Accounting Procedures and standards in the


international petroleum industry and in accordance


with the charts of accounts agreed under paragraph


C. 1.4.2 below.


C. 1.4.2 Within sixty (60) Days of the Effective Date of the


Contract, the Contractor shall submit to and discuss


with the Minister a proposed outline of charts of


accounts, books, records and reports, which outline


shall be in accordance with generally accepted


accounting practices used in the international


petroleum industry for production sharing contract


6 6


or joint venture operations, as the case may be. Within


ninety (90) Days of receiving the above submission,


the Minister shall either provide written notification of


its approval of the proposal or request in writing


revisions to the proposal. Within one hundred and


eighty (180) Days after the Effective Date of the


Contract, the Contractor and the Minister shall agree


on the outline of charts of accounts, books, and


records and reports which shall describe the basis of


the accounting system and procedures to be


developed and used hereunder. Following such


agreement, the Contractor shall expeditiously prepare


and provide the Minister with formal copies of the


comprehensive charts of accounts and manuals


related to the accounting, recording and reporting


functions, and procedures which are, and shall be,


observed under the Contract.


C.l.4.3 Notwithstanding the generality bfjhp-foregoing, the


Contractpf.sMalf stibmit regiila'r. Statements relating to


the PetEpfeufn Operations as follows:


\...: ’ (a) .. Production Statement (see paragraph


C/6 of this Accounting Procedure).


...... i ,(b) Value of Production and Pricing


i " Statement (see paragraph C.7 of this


Accounting Procedure).


(c) Profit Share Account Statement (see


paragraph C.8 of this Accounting


Procedure)


(d) Statement of Expenditures and


Receipts (see paragraph C. 9 of this


Accounting Procedure).


(e) Final End-of-Year Statement (see


paragraph C.lOof this Accounting


Procedure).


(f) Budget Statement (see paragraph C 11


of this Accounting Procedure).


C. 1.4.4 All reports and statements shall be prepared in accordance


with the Contract, the laws of Eritrea, and where there are


no relevant provisions of either of these, in accordance with


generally accepted practices in the international petroleum


industry.


67


C. 1.5 Language and Units of Account





Unless otherwise agreed, all accounts, records, books and


reports shall be maintained and prepared in the English


language and shall be recorded in Dollars. Where necessary


for clarification, the Contractor may also maintain accounts


and records in other languages and currencies.





C. 1.6 Audit and Inspection Rights of the Government


C.1.6.1 The Contractor shall appoint an auditor, approved by


the Minister, to audit, annually, the accounts and


records, including production records of the


C. 1.6.2 Petroleum Operations and report thereon. The cost


of such audit shall be borne by the Contractor.


The Minister, upon at leas) fifteen (15) Days advance


written notice .to'tfre.^Ubntractor, Miall have the right


to inspect ..and audit, during.nOjriyal- business hours, all


records and-Hdcuments supporting costs and expenses


such'-.as-.th'e Contractor's-‘‘.accounts, books, records,


‘‘invoices, cash .vouchers, debit notes, price lists or


similar documentation with respect to the Petroleum


Operatipnij-.hereunder.


Alf audits in respect of the Exploration Period shall be


C. 1.6.3


’••.conducted in Asmara or other designated location in


C. 1.6.4 Eritrea.


There shall be one audit in respect of the initial term


of the Exploration Period and one audit in respect of


each extension of the Exploration Period. Such audits


C.1.6.5 shall be commenced within six (6) months of the end


of the relevant period.


Following the end of the Exploration Period,


Government audits shall be conducted annually. Such


audits shall commence within a period of two (2)


C.1.6.6 years following completion of the year under audit.


The costs of any audits conducted for the


Government within Eritrea shall be borne by the


C.l.6.7 Contractor as a Petroleum Operations Expenditure


Any audit exceptions shall be made in writing and


notified to the Contractor within one hundred and


eighty (180) Days, following completion of audit in


question (which audit shall be recorded in an





68


exchange of letters between the Contractor and the


Minister), and failure to give such written exception


within such time shall be deemed to be" an


acknowledgment of the correctness of the


Contractor's books and accounts.


C. 1.6.8 For purposes of auditing, the Government may


examine and verify all charges and credits relating to


the Petroleum Operations, such as books of account,


accounting entries, material records and inventories,


vouchers, payrolls, invoices and any other documents,


correspondence and records considered necessary by


the Government to audit and verify the charges and


credits. Furthermore, the auditors shall have the right


in connection with such audit, to visit and inspect at


reasonable times, all sites, plants, facilities,


warehouses and offices.’.of the Contractor directly or


indirectly serving-..the. \Petf oleum Operations and to


question personnel associated wi-th' those Operations.


Where ,.th.e .-; Government -.f requi’res verification of


charges .jqade by an Affiliate of the Contractor, the


.••Government shall have,the right to obtain an audit


'certificate from, an';internationally recognized firm of


public accountants acceptable to both the Minister


and.-ifie-.'-.Contractor, which firm may be the


...£d.ntracfor's statutory auditor. The costs of such


•’ audits shall be charged to Petroleum Operations


"Costs.


C. 1.6.9 The Contractor shall respond to any notice of


exception under paragraph C. 1.6.7 within ninety (90)


Days of the receipt of such notice. Where the


Contractor has , after the said ninety (90) Days, failed


to respond to a notice of exception, the exception


shall prevail.


C.l .6.10 All agreed adjustments resulting from an audit and ail


adjustments required by prevailing exceptions shall be


promptly made in the Contractor's accounts and any


consequential adjustments to payments due to the


Government shall be made promptly


C. 1.6.11 If the Contractor and the Minister are unable to reach


final agreement on proposed audit adjustments they


may, by mutual agreement, refer their dispute for a


binding expen determination in accordance with the


provisions of Section 16.2.1 of the Contract. When


issues are outstanding with respect to an audit, the





69


 Contractor shall maintain the relevant documents and


permit inspection thereof until the issue is resolved.


C.l.7 Payments





C.l.7.1 All payments between the Parties shall, unless otherwise


agreed, be in Dollars and be made through a bank designated


C.l.7.2 by each receiving Party.


All sums due by one Party to the other under the Contract


during any month shall, for each Day such sums are overdue


during such month, bear interest compounded daily at the


C.l.8 LIBOR rate plus_ percent (_%).


Arm’s-Length Transactions





Unless otherwise specifically provided for in the Contract, all


transactions giving rise to -revenues, costs or expenses which


shall be credited or changed to'the books, ^accounts, records and


reports prepared,..maintained or submitted hereunder shall be


conducted at.arm'sUeftgth or on.such a basis as will assure that


all such rey.eiiife's,'costs or expenses will not be higher or lower,


as the case-: may be, -than : would result from a transaction


conducted at arm's, '-length on a competitive basis with third


parties. j-.V'"-'-- '


C. 1.9- Currency Exchange Rates





The book-keeping exchange rate shall be established monthly,


based on the arithmetic average of the closing buy and sell rates


for the Dollar against the Eritrean currency unit for the last


working Day of the preceding month, as published by the Bank


of Eritrea.





The book-keeping exchange rate of the last working Day of


each Calendar Month shall be used for exchange transactions


and for the purpose of determining the counter value of Dollars


in the Eritrean currency unit for the next succeeding month and


for subsequent months, until changed in accordance with the


following provisions. The book-keeping exchange rate shall be


changed when the arithmetic average of the closing buy and sell


rates for any subsequent Calendar Month varies from the


currently applicable book-keeping exchange rate by more than


one percent (1%) higher or lower.


The book-keeping exchange rate for all expenditures or credits


received which are denominated in a currency other than Dollars


or the Eritrean currency unit shall be the rate established using





70


Contractor's standard translation policy. This rate will be used


in all applicable reports, accounts and accounting statements.


All exchange gains or losses will be charged to Petroleum


Operations Costs.


C.110 Revision of the Accounting Procedure


By mutual agreement between the Government and the


Contractor this Accounting Procedure may be revised from time


to time by a document in writing signed by the Parties.


C. 1.11 Accrual Basis


All books and accounts shall be prepared on an accrual basis.


Revenues shall be attributed to the accounting period in


which they are earned, and % costs and expenses to the


accounting period in which •;.they'are incurred, without the


need to distinguish whether Cash is recQVered or disbursed in


connection with. a’.p.arfieular transaction^ Costs and expenses


shall be deemdd..to. have been incfi.rred, in the case of physical


items, in'.the- 'ac’counting period, when title thereto passes to


the Contractor, and .in the case of services, in the accounting


period when such\servicCs are performed. All Government


reporting (C-. LT.‘3):-.shall be prepared on a cash-flow basis. A


quarterly, ind yearly reconciliation between cash-flow basis


and accrual basis will be provided with the reports specified


in C.i.'4'.i


C 1.12 Values and Treatments


Values and treatments proposed by the Contractor relating to


all costs and expenses shall be subject to challenge by


Government in the course of audit to ensure that they are in


„ accordance with the provisions of this Accounting Procedure.


Upon request by the Minister or its representative, the


Contractor shall present all records and original documents


supporting such costs or expenses, such as invoices, cash


vouchers, debit notes, price lists or similar documentation


verifying the values and treatment proposed





PARAGRAPH C.2 : CLASSIFICATION, DEFINITION AND


ALLOCATION OF COSTS AND EXPENDITURES


C.2.1 Segregation of Expenditures





Expenditures shall be segregated in accordance with the


purposes for which such expenditures are made. The


71


purposes which shall qualify are those which have been


included in the approved work program and work program


budget for the year in which the expenditure is made and


other items which have been agreed to by the Parties from


time to time. All expenditures allowable under paragraph C.3


relating to Petroleum Operations shall be classified, defined


and allocated as set out below. Expenditure records shall be


maintained in such a way as to enable proper allocation to


each Field in the event of a Commercial Discovery.


C.2.2 Exploration Expenditures


Exploration Expenditures are all direct and allocated indirect


expenditures incurred in the search for Petroleum in an area


which is, or was at the time when such costs were incurred,


part of the Contract Area including:


C.2.2.1 Aerial, geophysical^, ggbchemical, paleontological,


geological, ..topographical and., seismic surveys and


studies-and t-heir interpretation' '





C.2.2.2.... fc.ore'-.hole drilling and water Well drilling.





C.2.2.3 ' Labor,.. Material's, supplies, and services used in


E>rithng\Wells with the object of finding Petroleum


pf-Appraisal Wells provided such Wells are not


.Completed as producing Wells.


C.2.2.4 Facilities used solely in support of the purposes


described in paragraphs C.2.2.1, C.2.2.2 and


C.2.2.3 above, including access roads and


purchased geological and geophysical information,


all separately identified.


C.2.2.5 That portion of all Service Expenditures and that


portion of all General and Administrative


Expenditures allocated to Exploration


Expenditures as determined by the proportionate


share of total Petroleum Operations Costs


(excluding General and Administrative


Expenditures. and Service Expenditures)


represented by all other Exploration Expenditures.


C.2.2.6 Any other expenditures incurred in the search for


and appraisal of Petroleum after the Effective Date


but prior to Initial Regular Production of the


relevant Field and not covered under paragraph


C.2.3.








72


 C.2.3 Development Expenditures


Development Expenditures shall consist of all expenditures


incurred in:





C.2.3.1 Drilling Wells which are completed as


producing Wells and Drilling Wells for


purposes of production from a Field whether


these Wells are dry or producing and drilling


Wells for the injection of water or gas to


enhance recovery of Petroleum.


C.2.3.2 Completing Wells by way of installation of


casing or equipment or otherwise after a Well


has been drilled for the purpose of bringing the


Well into use as a producing Well or as a


Well for the injection of water or gas to


enhance recovery of Petroleum.


C.2.3.3 Thfc‘ costs- ' of Field' 'Petroleum production,


'•'.transport and,., storage' facilities such as


..‘•'••.pipelines, -flow-., 'lines, production and


treatment '; units, wellhead equipment,


subsurface--'' equipment, enhanced recovery


...."'s.ysiems, offshore platforms, Petroleum


‘•storage facilities, export terminals and piers,


harbors and related facilities, and access roads


for production activities.


C.2.3.4 Engineering and design studies for facilities


referred to in paragraph C. 2.3.3.


C.2.3.5 That portion of all Service Expenditures and


that portion of all General and Administrative


Expenditures allocated to Development


Expenditures as determined by the


proportionate share of total Petroleum


Operations Expenditures (excluding General


and Administrative Expenditures and Service


Expenditures) represented by all other


Development Expenditures.





C.2.4 Operating Expenditures





Operating Expenditures are all expenditures incurred in


Petroleum Operations after Initial Regular Production which


are other than Exploration Expenditures, Development


Expenditures, General and Administrative Expenditures and


Service Expenditures The balance of General and


73


Administrative Expenditures and Service Expenditures not


allocated to the Exploration Expenditures or Development


Expenditures shall be allocated to Operating Expenditures.


Service Expenditures


Service Expenditures are expenditures in support of


Petroleum Operations including warehouses, piers, marine


vessels, vehicles, motorized rolling equipment, aircraft, fire


and security stations, workshops, water and sewerage plants,


power plants, housing, community and recreational facilities


and furniture, tools and equipment used in these activities.


Service Expenditures in any Calendar Year shall include the


costs incurred in such year to purchase and/or construct the


said facilities as well as the annual costs of maintaining and


operating the same. All Service Expenditures shall be


regularly allocated as specified. in paragraphs C.2.2.5,


C.2.3.5 and C.2.4 to Exploration-Expenditures, Development


Expenditures and Operating’ Expenditures., and shall be


separately shown'.'uhd-er-'each of •.•these;’ categories. Where


Service Expenditures are made in respect of shared facilities


the basis bp-allocation of ..costs'- to Petroleum Operations


hereunder .‘shall be specified in ’the Statement of Expenditures


and Receipts listed .in paragraph C. 1 4.3(d).


General and Administrative Expenditures


General-and Administrative Expenditures are direct and


indirect overhead as described in paragraphs C.2.6.1 and


C.2.6.2:


C.2.6.1 Direct Overhead


Direct Overhead covers all main office, field office


and general administrative expenditures of the


Contractor and its Affiliates in the State of Eritrea


including but not limited to supervisory, accounting


and employee relations services.


Services performed outside Eritrea by the


departments of the Contractor and its Affiliates


which directly benefit Petroleum Operations under


the Contract shall be charged as direct costs in


accordance with paragraph C.3 of this Annex C.


C.2.6.2 Indirect Overhead


Indirect Overhead covers an annual overhead charge


for indirect services rendered by the Contractor’s


Affiliates outside Eritrea to support and manage


Petroleum Operations under the Contract (Affiliate


overhead). Affiliate overhead will be deemed to


cover the actual cost incurred for indirect services


rendered by those functions of Contractor’s Affiliates


which:


(i) cannot, without unreasonable effort and/or


expenditure or without the release of


confidential data proprietary to Contractor’s


Affiliates be charged under any other Section


of this Annex C; and


(ii) are properly allocable to Petroleum Operations


under the Contract.


In respect of the indirect costs of Contractor’s


Affiliates, as described -above, the Contractor shall


charge monthly to Petroleum Operations an amount


equal to fheftotaf of the folloiving:


.. • • • C :2’.;6.2.1 Indirect .Exploration Overhead


Thev'Contractor shall be entitled to an





.‘•annual charge based on a sliding scale


... : : ’*• percentage and charged monthly to


Petroleum Operations. The basis for


applying this percentage shall be the


total of Allowable Petroleum


Exploration Expenditures during each,


Calendar Year or fraction thereof less


expenditures which have been subjected


to the four percent (4%) fee, referred to


in paragraph C. 3.1.8(b). The sliding


scale percentage shall be calculated as


follows:


- For the first four million Dollars __%


- For the next four million Dollars_%


- Over eight million Dollars _%





The foregoing percentages may be


reviewed but not more often than


annually, and any approved adjustment


shall be made, prospectively.





C.2.6.2.2 Indirect Development and Production


Operations - Overhead





75


The overhead rates applicable to


Development and Production Operations


shall be agreed upon between the


Parties in due course and shall


incorporate the following guidelines:


(a) The indirect rates and related


calculation method for


Development and Production


Operations shall be agreed to


between the Parties prior to


submission of the first annual


budget for those phases of


operations.


(b) The maximum percentage rates may


be revised by mutual agreement not


more, often than annually. The initial


..• ' ■‘maximum percentage rates and the


‘.....types of .expenditures to which they


\ .{ \ apply Shall, be-agreed to as soon as


..... the laities possess reasonably


\' } ’• reliable cost estimates for the Field.


(c) The Contractor must budget for


•’ V- overhead charges.


C.2.6.3 All General and Administrative Expenditures shall be regularly


allocated as specified in paragraphs C.2.2.5, C.2.3.5 and C.2.4


to Exploration Expenditures, Development Expenditures and


Operating Expenditures, respectively.








PARAGRAPH C.3: COSTS, EXPENSES, EXPENDITURES AND


CREDITS OF THE CONTRACTOR


C.3.1 Costs Allowable Without Further Approval of Government





Petroleum Operations Costs incurred by the Contractor


pursuant to the Contract as classified under the headings


referred to in paragraph C.2 shall be allowable for the


purpose of Section 7 of the Contract (except to the extent


provided in paragraph C.4.2.2 or elsewhere in this


Accounting Procedure), subject to audit as provided for


herein.














76


C 3 1 1 Surface Rights





Ail direct costs necessary for the acquisition, renewal or


relinquishment of surface rights acquired and maintained in


force for the purposes of the Contract.


C.3.1.2 Labor and Associated Labor Costs





(a) Contractor's locally recruited employees based in


Eritrea


Costs of all Contractor's locally recruited employees





who are directly engaged in the conduct of Petroleum


Operations under the Contract in the Territory of


Eritrea. Such costs shall include the costs of employee


benefits and Government benefits for employees and


levies imposed on the-G.ontractor as an employer,


transportation ..ami v-.jrelocation costs within the


Territory of ;'Eritrea' of tfieV ejmpJoyee and such


members off Her employee's" family (limited to spouse


and-., dependent children), as required by law or


•.• custdinary praecipe..in Eritrea. If such employees are


engaged in other activities in the Territory of Eritrea,


in additiorf to Petroleum Operations, the cost of such


employees'-shall be apportioned on a time sheet basis


..■•according to sound and acceptable accounting


i principles.


(b) Assigned Personnel





Costs of salaries and wages including bonuses of the


Contractor's employees directly and necessarily


engaged in the conduct of the Petroleum Operations


under the Contract, whether temporarily or


permanently assigned, irrespective of the location of


such employees, it being understood that in the case


of those personnel only a portion of whose time is


wholly dedicated to Petroleum Operations under the


Contract, only that pro-rata portion of applicable


salaries, wages, and other costs as specified in


paragraphs C.3.1.2(c), (d), (e), (f) and (g), shall be


charged and the basis of such pro-rata allocation shall


be specified.


(c) The Contractor's costs regarding holiday, vacation,


sickness and disability benefits and living and housing


and other customary allowances applicable to the


salaries and wages chargeable under paragraph


C. 3.1 2(b) above


(d) Expenses or contributions made pursuant to


assessments or obligations imposed under the laws of


Eritrea which are applicable to the Contractor's cost


of salaries and wages chargeable under paragraph


C.3.1 2(b) above


(e) The Contractor's cost of established plans for


employees' group life insurance, hospitalization,


pension, stock purchase, savings, bonus, and other


benefit plans of a like nature customarily granted to


the Contractor's employees, provided however that


such costs are in accordance with generally accepted


standards in the international petroleum industry,


applicable to salaries and wages chargeable to


Petroleum Operations under paragraph C.3.1.2(b)


above. .


(f) Personal incom'e” takes’"where and when they are paid


by the Cortfractor-’to the GoVerhriVerit for employees,


in accok&nce with 'the\ Contractor's standard


.personnel policies. •;


(g) Reasonable’ transportation and travel expenses of


emp]qyees\6f the Contractor, including those made


foif travel and relocation of the expatriate employees,


inefadihg their families and personal effects, assigned


' ••to the Territory of Eritrea and whose salaries and


wages are chargeable to Petroleum Operations under


paragraph C.3.1 2(b) above.


Actual transportation expenses of personnel


transferred to Petroleum Operations from their


country of origin shall be charged to the Petroleum


Operations. Transportation expenses of personnel


transferred from Petroleum Operations to a country


other than the country of their origin shall not be


charged to the Petroleum Operations. Transportation


cost as used in this Section shall mean the cost of


freight and passenger service, meals, hotels, insurance


and other expenditures related to vacation and


transfer travel and authorized under the Contractor's


standard personnel policies. The Contractor shall


ensure that all expenditures related to transportation


costs are equitably allocated to the activities which


have benefited from the personnel concerned.


(h) Reasonable personal expenses of personnel whose


salaries and wages are chargeable to Petroleum


78


Operations under paragraph C.3.1 -2(b) above and for


which expenses such personnel are reimbursed under


the Contractor's standard personnel policies. In the


event such expenses are not wholly attributable to


Petroleum Operations, the Petroleum Operations shall


be charged with only the applicable portion thereof,


which shall be determined on an equitable basis.


C.3.1.3 Transportation and Employee Relocation Costs


The cost of transportation of employees, equipment, materials


and supplies other than as provided in paragraph C.3.1.2(g)


necessary for the conduct of the Petroleum Operations under


the Contract along with other related costs such as, but not


limited to, import duties, customs fees, unloading charges,


dock fees, and inland and ocean freight charges.


C.3.1.4 Charges for Services .•••.. v-..\ •••*


(a) Third Parties.. \ \ \


•.•/The/'ketual costs.'of contract services, services of


'•.professional'consultants, utilities, and other services


necessary\'for the conduct of the Petroleum


Operations under the Contract performed by third


..••••partied ‘other than an Affiliate of the Contractor


\ provided that the transactions resulting in such costs


‘“’are undertaken pursuant to paragraph C.1.8.


(b) Affiliates of Contractor


1. Professional and Administrative Services


Expenses - cost of professional and


administrative services provided by any


Affiliates of the. Contractor for the direct


benefit of Petroleum Operations, including


but not limited to, services provided by the


Production, Exploration, Legal, Financial,


Insurance, Accounting and Computer Services


Divisions other than those covered by


paragraphs C.3.1.4(b)2, C.-3.1.6 and


C.3.1.8(b) which the Contractor may use in


lieu of having its own employees. Charges


shall reflect the cost of providing their services


and shall not include any element of profit and


shall be no less favorable than similar charges


for other operations carried on by the


Contractor and its Affiliates and shall not be


79


higher than rates charged by third parties for


like services. The chargeout rate shall include


all costs incidental to the employment of such


personnel. Where the work is performed


outside Eritrea, the daily rate shall be charged


from the date such personnel leave the town


where they usually work in Eritrea up to their


return thereto, including Days which are not


working Days in the country where the work


is performed, excluding any holiday


entitlements derived by such personnel from


their employment in Eritrea.


2. Scientific or Technical Personnel - cost of


scientific or technical personnel services


provided by any Affiliate of the Contractor


for the direct benefit of-.Petroleum


Operations, which cost .slfall 'be charged on a


cost of service basis. -’Charges therefori’shall.-


not exceed charges.. for' comparable services


currently provided’’ by outside, technical


service organizations..... ■•of • comparable


qualificatipfis.. Unless tji'e Work to be done by


such personnel is. covered by an approved


budget and-work-program, the Contractor


shall not--.authorize work by such personnel


without approval of the Government.


Equipment and Facilities - costs related to the


use of equipment and facilities owned and


furnished by the Contractor's Affiliates, at


rates commensurate with the cost of


ownership and operation; provided, however,


that such rates shall not exceed those currently


prevailing for the supply of like equipment and


facilities on comparable terms in the area


where the Petroleum Operations are being


conducted. The equipment and facilities


referred to herein shall exclude major


investment items such as (but not limited to)


drilling rigs, producing platforms, oil treating


facilities, oil and gas loading and


transportation systems, storage and terminal


facilities and other major facilities, rates for


which shall be subject to separate agreement


with the Government.


C 3.1.5 Communications


Cost of acquiring, leasing, installing, operating, repairing and


maintaining communication systems including radio and


microwave facilities between the Contract Area and the


Contractor's nearest base facility.


C.3.1.6 Office, Shore Bases and Miscellaneous Facilities





Net cost to the Contractor of establishing, maintaining and


.operating any office, sub-office, shore base facility,


warehouse, housing or other facility directly serving the


Petroleum Operations. If any such facility renders service to


contract areas other than the Contract Area, the net costs


thereof shall be allocated on an equitable basis.





C.3.1.7 Ecological and Environment ••





Costs incurred in the Contract Area as A.jdsuk of legislation


for archaeological ..;:ahd ‘‘geophysicaK surveys relative to


identification And., protection ..of, cultural resources and/or


environmental'-o'r ecological-surveys as may be required by


regulatory.-Authorities. In addition, costs to provide or have


available pollution •■con't-airiment and removal equipment plus


costs of .-aciii'aR control and cleanup and resulting


responsibil'ities.-of oil spills as required by applicable laws and


regulations.





C.3.1.8 Material Costs


Costs of Materials and supplies, equipment, machines, tools


and any other goods of a similar nature used or consumed in


Petroleum Operations subject to the following:


(a) Acquisition - the Contractor shall only supply or





purchase Materials for use in Petroleum Operations


that may be used in the foreseeable future. The


accumulation of surplus Materials shall be avoided so


far as is reasonably practicable and consistent with


efficient and economical operations. Inventory levels


shall, however, take into account the time lag for


replacement, emergency needs, weather conditions


affecting operations and similar considerations;





(b) Components of costs, arm’s-length transactions -


except as otherwise provided in paragraph C.3.1.8(d)


below, Material for use in Petroleum Operations


under the Contract shall be purchased by the


Contractor in arm's length transactions in the open


81


market (net cost). The net cost of Materia! shall


include invoice price less trade and cash discounts, if


any, plus purchase and procurement fees, plus freight


and forwarding charges between point of supply and


point of shipment, freight to port of destination,


insurance, taxes, customs duties, consular fees, excise


taxes, other items chargeable against imported


Material and, where applicable, handling and


transportation expenses from point of importation to


warehouse or operating site. Where an Affiliate of the


Contractor has arranged the purchase and coordinated


the forwarding and expediting effort, a fee equal to


four percent (4%) of the value of the Materials shall


be added to the cost of the Materials purchased;


Inventory Accounting- Material costs will be charged


to the inventory when title passes to tire'‘ Contractor


and will be charged to Petrojeujfft. Operation costs


when consumed from inventoiy calculated based: on-‘


the weighted average cost*, method; . \ -


Material purchased, from or sold-tp.; Affiliates of the


Contractor or transferred from pthbr'activities of the


Contractor to or from! Pe.ttxjleum Operations under


this Contract shall bOatued and charged or credited


at the prices .specified in paragraphs C.3.1.8(d)l,


C.3.1,8(d)2 anid C,-3.1,8(d)3 hereof:


1. New Material (Condition “A”) shall be


valued at the current net cost as determined t


in accordance with paragraph C.3.1.8(b).


2. Used Material (Conditions “B”, “C” and


“D”):


(a) Material which is in sound and


serviceable condition and is suitable for


reuse without repair or reconditioning


shall be classified as Condition “B”


and priced at seventy-five percent


(75%) of such new purchase net cost


at the time of transfer;


(b) Material not meeting the requirements


of paragraph C.3.1 8(d)2(a) above, but


which can be made suitable for use


after being repaired or reconditioned,


shall be classified as Condition “C” and


priced at fifty percent (50%) of such


new purchased net cost at the time of


transfer. The cost of reconditioning


shall also be charged to the


reconditioned Material provided that


condition “C” price plus the cost of


reconditioning does not exceed the


condition “B” price; and provided that


Material so classified meet the


requirements for condition “B”


Material upon being repaired or


reconditioned; and


(c) Material which cannot be classified as


Condition “B” or Condition “C” shall


be classified as Condition “D” and


priced at a value commensurate with


its use by the Contractor.-; If •■•Material


is not fit for use by the vOonfractor it,


shall be disposed bf aS jtink. Material


involving .erectii^ri" costs shall \ f>e


charged.. at-.. -the‘ applicable, condition


percentage - ' of ..... the . current


knocked-down ..price ofriew Material


as defined in •paragraph C.3.1.8(d)l


above. '


When the. usejof Material is temporary and its


service to Petroleum Operations under the


Contract does not justify the reduction in


price as provided for in paragraph C.3.1.8 (d) t


2(b) hereof, such Material shall be priced on a


basis that will result in a net charge to the


accounts under the Contract consistent with


the value of the service rendered.


Premium prices - whenever Materials is not


readily obtainable at published or listed prices


because of national emergencies, strikes or


other unusual causes over which the


Contractor has no control, the Contractor may


charge Petroleum Operations for the required


Material at the Contractor's actual cost


incurred in providing such Material, including


the cost of making the Material suitable for


use, and in moving it to the Contract Area;


provided notice in writing is furnished to the


Minister of the proposed charge prior to


charging Petroleum Operations for such


Material and the Minister shall have the right


to challenge the transaction on audit.


5 Warranty of Material furnished by the


Contractor - The Contractor does not warrant


the Material furnished by the Contractor for


Petroleum Operations. The Contractor shall


secure warranty from the vendor, as is


customary in the international oil and gas


industry, for the purchase of new Material


furnished for Petroleum Operations. In case


of defective Material, credit shall not be


passed to Petroleum Operations until


adjustment has been received by the


Contractor from the manufacturers of the


material or their agents.


C.3.1.9 Rentals, Duties and Other Assessments


Ail rentals, production''payments,.. t£xes,\fevies, charges, fees,


contributions kncf.ahy other assessments and charges of every


kind and nature levied by. any governmental or taxing


authority ift connection'-.with'-the Contractor's activities under


the Contract and’'-paid-, directly by the Contractor (except


where the Qontfa'ryviS expressly provided in the Contract) and


of payments made under the provisions of Section VII of the


Contract. •


C. 3.1.10 Insurance and Losses


Insurance premiums and costs incurred for insurance pursuant


to the Contract and the Petroleum Regulations provided that


such insurance is customary, affords prudent protection


against risk and is at a premium no higher than that charged


on a competitive basis by insurance companies which are not


Affiliates of the Contractor. Except in cases of failure to


insure where insurance coverage is required pursuant to


Article 30 of the Petroleum Regulations, actual costs and


losses incurred shall be allowable to the extent not made


good by insurance. Such costs may include, but are not


limited to, repair and replacement of property in the Contract


Area resulting from damages or losses caused by fire, flood,


storm, theft, accident or such other cause.


C.3.1.11 Legal Expenses


All reasonable costs and expenses resulting from the handling,


investigating, asserting, defending, or settling of any claim or


legal action necessary or expedient for the procuring,


84


 perfecting, retention and protection of the Contract Area, and


in defending or prosecuting lawsuits involving the Contract


Area or any third party claim arising out of Petroleum


Operations under the Contract, or sums paid in respect of


legal services necessary for the protection of the joint interest


of the Government and the Contractor shall be allowable.


Such expenditures shall include, without limitation, attorney’s


fees, court costs, costs of investigation, and procurement of


evidence and amounts paid in settlement or satisfaction of any


such litigation and claims provided such costs are not covered


elsewhere in the Accounting Procedure. Where legal services


are rendered in such matters by salaried or regularly retained


lawyers of the Contractor or an Affiliate of the Contractor,


such compensation shall be included instead under paragraph


C.3.1.2 or C.3.1.4(b) above as applicable.





C.3.1.12 Claims :


Expenditures made in’ the: settlement qt.. satisfaction of any


loss, claim, danjLQge^judgriient or otheK expense arising out of


or relating to Retrpreum Operations,'except as may otherwise


be covered elsewhere in the. Accounting Procedure.


C.3.1.13 Training Costs \\ -





All costs ^and /expenses incurred by the Contractor in the


training df "its Eritrean employees engaged in Petroleum


Operations under the Contract and such other training as


required under Section 3.5 of the Contract.


C.3.1.14 General and Administrative Costs


The direct overhead costs described in paragraph C 2.6.1





and the indirect overhead charge described in paragraph


C.2.6.2.


C.3.1.15 Other Expenditures





Other reasonable expenditures not covered or dealt with in


the foregoing provisions of paragraph C.3 herein which are


necessarily incurred by the Contractor for the proper,


economical and efficient conduct of Petroleum Operations.


C.3.2 Credit Under the Contract





The proceeds received from Petroleum Operations under the


Contract, including but not limited to the items listed below


shall be credited to the accounts under the Contract:








85


 C 3.2.1 The proceeds of any insurance settlement or


claim or judicial awards in connection with


Petroleum Operations under the Contract or


any Assets charged to the accounts under the


Contract where such operations or Assets


have been insured and the premiums charged


to the accounts under the Contract,





C.3.2.2 Legal costs charged to the accounts under


paragraph C.3.1.11 and subsequently


recovered by the Contractor.


C.3.2.3 Revenue received from third parties for the


use of property or Assets, the cost of which


has been charged to the accounts under the


Contract.


C.3.2.4 Any adjus.tm$ht .received by the Contractor


from The-. suppliers/manufacturers or their


agbnts'in.connection with'a defective Material,


\tjte 'cost of which v/as previously charged by


•-.the Contractor. the accounts under the


Contract.


/‘••Rentals, refunds or other credits received by


C.3.2.5


’•the Contractor which apply to any charge


which has been made to the accounts under


the Contract, but excluding any award granted


to the Contractor under arbitration or sole


expert proceedings referred to in paragraph


C.4.2.2(g).


C.3.2.6 Materials costs originally charged to Petroleum


Operations Costs and subsequently exported


from the Territory of Eritrea for use by the


Contractor or its Affiliates in operations


outside Eritrea.


Proceeds from the sale or exchange by the


C.3.2.7


Contractor of plants or facilities which have


been charged to the accounts under the


Contract for the relevant Field.





C.3.2.8 Proceeds from the sale or exchange by the


Contractor of any Petroleum rights being an


interest in the Contract Area and not


constituting an assignment under Section 3.13


of the Contract








86


C.3.2.9 Proceeds from the sale of any Petroleum


information which relates to the Contract Area


provided that the acquisition costs of such


information have been charged to the accounts


under the Contract.


C.3.2.10 Proceeds derived from the sale or license of


any intellectual property, the development


costs of which were incurred pursuant to the


Contract.


C.3.2.11 Proceeds derived from the sale, exchange,


lease, hire, transfer or disposal in any manner


whatsoever of any other item, the costs of


which have been charged to Petroleum


Operations.


C.3.3 Duplication of Charges afta'Credits


Notwithstandiriig,ariy provision \to\ the contrary in this


Accounting Procedure, it is the-intention that there shall be


no duplication of charges or- credits to the accounts under the


Contract.





PARAGRAPH C. 4i PETROLEUM OPERATIONS EXPENDITURES





C.4.X Definition for the Purpose of Determining Compliance


with the Minimum Exploration Expenditures Obligation


In determining the Contractor's compliance with the minimum


Exploration Expenditures obligations undertaken pursuant to


the Contract, Petroleum Operations Costs shall consist only


of ajl Exploration Expenditures incurred in the performance


of Exploration Operations in accordance with approved


work programs in the contract year in question; provided,


however, that expenditures incurred in training Eritrean


nationals pursuant to Section 3.5 of the Contract and the


value of stock listed in inventory shall be excluded from


Petroleum Operations Costs for the purpose of this paragraph


C.4.1.


C.4.2 Definition for the Purpose of Section Vn





C.4.2.1 For each Field and for each Calendar Year, including any


Calendar Year prior to the Calendar Year in which Initial


Commercial Production first occurs, Petroleum Operations








87


Costs, for the purposes of Section VII of the Contract shall


consist of:


(a) all Petroleum Operations Costs made in that


Calendar Year in respect of the Field in


question, plus


(b) the Contractor's share of all Exploration


Expenditure, wherever incurred in the


Contract Area, up to the date on which the


Minister approves the work program and


work program budget for the Field concerned


submitted pursuant to Section 5.4 of the


Contract, provided that such Exploration


Expenditure has not been included, for


purposes of Section VII, in the Petroleum


Operations CostCmade in respect of another


Field in tha.Coikraet Axea. ,


C.4.2.2 The following .Qcrstsi and 'expens.es;'shaff not be included in


Petroleum Qp'eraftidns Costs for the'-purposes of Section VII


of the Contract:''


(a) the signature bonds;


(b) ...arty payments made to the Government for failure to


i fulfill" the minimum expenditure obligations in


"Accordance with Section V of the Contract;


(c) costs incurred before the Effective Date;


(d) interest and any other financing charges incurred on


loans raised to finance Petroleum Operations;


(e) costs of marketing or transportation of Petroleum


beyond the F.O.B. point of exportation or the point


of entry into a system for domestic consumption;


(f) the cost of any letter of guarantee of the Contract


and any other amounts spent on indemnities with


regard to nonfulfillment of contractual obligations;


(g) attorney's fees and other costs of proceedings in


connection with arbitration under Section 16.1.2 of


the Contract or expert determination as provided in


the Contract or this Accounting Procedure, and


(h) fines and penalties imposed under the laws of Eritrea.





88


 C.4.2.3 All credits under the Contract received in accordance with


paragraph C.3.2 of this Accounting Procedure shall, be


credited to the accounts for the purposes , of Section VII of


the Contract.








PARAGRAPH C.5: RECORDS AND VALUATION OF ASSETS





C.5.1 Records


The Contractor shall maintain detailed records of property in





use for Petroleum Operations under the Contract in


accordance with normal practice in exploration and


production activities in the international petroleum industry.








C.5.2 Inventories during Inilial'ExpIoiration Operations





Prior to the date-, of-approval of.tfi'e first work program and


work program budget submitted pursuant to Section 5.1.7 of


the Contract tfie Contractor:shall prepare an annual schedule


(to be included as part of'the Statement required under


paragraph C. 1Q! .of.this Accounting Procedure) of all property


in use for Pe'frol'e.uhii Operations and its value as shown in the


Contractor^, records.


C.5.3 Inventories in Subsequent Operations





Subsequent to the date of approval of the first work program


and work program budget submitted pursuant to Section


5.1.7 of the Contract, inventories of property in use in


Petroleum Operations under the Contract shall be taken at


reasonable intervals but at least once a year with respect to


movable Assets and once every three (3) years with respect


to immovable Assets. The Contractor shall give the Minister


at least thirty (30) Days written notice of its intention to take


such inventory and the Minister shall have the right to be


represented when such inventory is taken. The Contractor


shall clearly state the principles upon which valuation of the


inventory has been based. The Contractor shall make every


effort to provide to the Minister a full report on such


inventory within thirty (30) Days of the taking of the


inventory. When an assignment of rights under the Contract


takes place the Contractor may, at the request of the


assignee, take a special inventory provided that the costs of


such inventory are borne by the assignee.








9


 PARAGRAPH C.6: PRODUCTION STATEMENT





C.6.1 Production Information


Without prejudice to the Petroleum Regulations or the


Contract, from the date of Initial Regular Production from


the Contract Area, the Contractor shall submit a monthly


Production Statement to the Government showing the


following information separately for each producing Field and


in aggregate for the Contract Area:





C.6.1.1 The quantity of Crude Oil produced and saved;


C.6.1.2 The quality characteristics of such Crude Oil


produced and saved;


C.6.1.3 The quantity, of Natural Gas produced and


saved; '• .


C.6.1.4 , ’'The. quality characteristics of such Natural Gas


• • ''•produced .arid • saved;


C.6.1.5 The-.-quantities of Crude Oil and Natural Gas


•j-.Used- for the purposes of carrying on drilling


arid production operations and pumping to


field storage;


C.6.1.6 The quantities of Crude Oil and Natural Gas


unavoidably lost;


C.6.1.7 The quantities of Natural Gas flared and


vented;


C.6.1.8 The size of Petroleum stocks held at the


beginning of the Calendar Month in question;


C.6.1.9 The size of Petroleum stocks held at the end


of the Calendar Month in question; and


C.6.1.10 The quantities of Natural Gas reinjected into


the Petroleum reservoir.





All quantities shown in this statement shall be expressed in


both volumetric terms (barrels of oil and cubic meters of gas)


and in weight (metric tons).











90


C.6.2 Submission of Production Statement





The Production Statement for each Calendar Month shall be


submitted to the Government no later than ten (10) Days


after the end of such Calendar Month.


PARAGRAPH C.7: VALUE OF PRODUCTION AND PRICING


STATEMENT


C.7.1 Value of Production and Pricing Statement Information


The Contractor shall for the purposes of Section XII of the


Contract, prepare a statement providing calculations of the


value of Crude Oil produced and saved during each Calendar


Quarter. \ ■•••.


This Statement shall, contain the foil owing Jnformation:





C.7.1.1 ... '-.The' quantities- ..prices and receipts realized


, ' therefor ,b.y the Contractor as a result of sales


of Crude. Oil to third parties made during the


^Calendar Quarter in question as defined in


•-..'siib--Article 17(1) of the Petroleum


..Regulations.


The quantities, prices and receipts realized


therefor by the Contractor as a result of sales


of Crude Oil made during the Calendar


Quarter in question, other than to third parties.


C.7.1.3 The value of stocks of Crude Oil at the end of


the Calendar Quarter preceding the Calendar


Quarter in question.


C.7.1.4 The value of stocks of Crude Oil at the end of


the Calendar Quarter in question.


C.7.1.5 Information available to the Contractor, insofar


as required for the purposes of Section XII of


the Contract, concerning the prices of


competitive Crude Oils produced by the main


petroleum producing and exporting countries


including contract prices, discounts and


premiums, and prices obtained on the spot


markets.








91


C.7.2 Submission of Value of Production and Pricing Statement





The value of production and pricing statement for each





Calendar Quarter shall be submitted to the Minister no later


than twenty one (21) Days after the end of such Calendar


Quarter.








PARAGRAPH C.8: PROFIT SHARE ACCOUNT STATEMENT





C.8.1 Quarterly Statement





The Contractor shall prepare with respect to each Calendar


Quarter a statement containing the following information for


the purposes of Section VII of the Contract with respect to


each Field: .z"


C.8.1.1 Allowable"-.‘and unrecovered Petroleum





Operations '’ Expenditijfres- ' 'arid Income Tax


'•‘.paymerits carried- forward from the previous


..... V.xQuarter, if any. \


C.8.1.2 ' AUd.w.able.--Petroleum Operations Costs and


.. "Income Tax payments for the Quarter in


{ ” question.





C.8.1.3- Cumulative Allowable Petroleum Operations


Expenditures and Income Tax payments for


the Quarter in question (paragraph C.8.1.1


plus paragraph C.8.1.2).





C.8.1.4 Gross Revenues (including credits under the


Contract) carried forward from the previous


Calendar Quarter, if any.


C.8.1.5 Gross Revenues (including credits under the





Contract) for the Calendar Quarter in


question.





A Quarterly Statement shall be submitted pursuant to Article 17 of


the Petroleum Regulations.





C.8.2 Annual Statement





The Annual Statement furnished pursuant to Section 7.2.2 of


the Contract shall contain the categories of information listed


in paragraph C.8.1 above for the Calendar Year in question








92


 and shall set out the position at the beginning and end of the


Calendar Year in question for each Field.





C.8.3 Separation of Expenditures


In both Quarterly and Annual Statements, Exploration,


Development and Operating Expenditures and Income Tax


payments, apportioned and charged to that Field, shall be


separately identified for each Field. The Contractor shall


specify the basis of allocation of shared expenditures or


payments. Exploration Expenditures prior to the date of


approval of the first work program and work program budget


submitted pursuant to Section 5.1.7 of the Contract or not


directly attributable to a specific Field shall be shown


separately.





C.8.4 Basis of Accounting


The Profit Share Account Statements shall §how expenditures


and receipts on a cash-flow basis. ..••• \ V ''





C.8.5 Recovery bility-and Deductibility of Petroleum


Operations


C.8.5.1 ... '•'•.-Tlte'-.determination of whether the costs and


expenses set forth herein are recoverable


/ . '••••••* Petroleum Operations Costs shall apply for


'• ••••■ the purpose of cost recovery under this


Contract, and shall not be interpreted to


preclude the Contractor from deducting said


amounts in computing its taxable income


under the applicable laws of Eritrea.





C.8.5.2 For the purpose of cost recovery under this


Contract, no depreciation shall apply for


recoverable Petroleum Operations Costs, as


such costs are, subject to the maximum


percentage limit specified in Section 7.1 of


this Contract, recoverable either in the


Calendar Year in which these Costs are


incurred or the Calendar Year in which


regular production commences, whichever is


the later.


PARAGRAPH C. 9: STATEMENT OF EXPENDITURE AND


RECEIPTS


C.9.1 Expenditures and Receipts Statements


The Contractor shall prepare with respect to each Calendar


Quarter a Statement of Expenditure and Receipts under the


Contract. The Statement shall distinguish between


Exploration Expenditures, Development Expenditures and


Operating Expenditures and shall separately identify all


significant items of expenditure within these categories. If the


Minister is not satisfied with the degree of disaggregation


within the categories he shall be entitled to ask for a more


detailed breakdown. The statement shall show the following:


C.9.1.1 Actual /'expenditures and receipts for the


Calendar..Quarter ii*;(question.


C.9.1.2. ... \ ..‘•‘■•..Cumulative-.^periditures and receipts for the


budget. yeaf:in question.


"Latest forecasted cumulative expenditures for


C.9.1.3


the year.


C.9.1


Variations between budget forecast and latest


forecast and explanations of variances.


C.9.2 Quarterly Statement





The statement of expenditures and receipts of each Calendar


Quarter shall be submitted to the Minister no later than


twenty one (21) Days after the end of such Calendar Quarter.








PARAGRAPH C . 10: FINAL END-OF-YEAR STATEMENT


C.10.1 Final End-of-Year Statement





The Contractor shall prepare a Final End-of-Year Statement.


The Statement shall contain aggregated information in the


same format as required in the Production Statement, Value


of Production and Pricing Statement, Profit Share Account


Statement, and Statement of Expenditure and Receipts but


shall be based on actual quantities of Petroleum produced and


expenses incurred. Based upon this statement, any


adjustments that are necessary shall be made to the


94





 transactions concerned under the Contract. The Final


End-of-Year Statement for each Calendar Year shall be


submitted to the Minister within sixty (60) Days of the end of


such Calendar Year.








PARAGRAPH C . 11: BUDGET STATEMENT


C.11.1 Annual Budget Statement





The Contractor shall prepare an annual budget statement.


This statement shall distinguish between budgeted


Exploration Expenditures, Development Expenditures and


Operating Expenditures and shall show the following:


C. 11.1.1 Forecasted expenditures and receipts for the


budget year in question.


C. 11.1.2 Cumulative expenditures and receipts to the


.end-p-f .the said budget year.


C.l 1.1:3‘X y'"'A schedule-.-showing the most important





individual items of Petroleum Operations


.Expenditures for said budget year.





Annual- Budget Statement Due Dates


C.11.2





The Budget Statement shall be submitted to the Minister with


respect to each budget year no less than ninety (90) Days


before the start of such budget year provided that in the case


of the year in which the Effective Date falls, the Budget


Statement shall be submitted within ninety (90) Days of the


Effective Date,









































5


 ANNEX D: PARTICIPATION AGREEMENT








THIS PARTICIPATION AGREEMENT, made and entered into on this __day of _


_ 19_, by and among_incorporated under the laws of having


established a place of business at_


incorporated under the laws of having established a place of business at_


_incorporated under the laws of


having established a place of business at __-


_incorporated- under the laws of having


established a place of business at ... \ X _.< \ '{_





WHEREAS the Government an&.the Contractor haye'entered into a Production Sharing


Contract in Eritrea (referred to as the "Contract"), to which this Annex is attached;


WHEREAS the Government has-.decided'to exercise its option under Section VI of the


Contract and has appointed i } as the specialized Government entity referred to


in Section 6.1.1 of the Contract (hereafter "Appointee"); and


WHEREAS the Parties wish to set forth the terms and conditions under which the


Government has agreed to participate in the Petroleum Operations in respect of_








NOW, THEREFORE, the Parties have agreed as follows:





1 INTERPRETATION


1.1 In this Participation Agreement, words in the singular include the plural


and vice versa, and except where the context otherwise requires:


1.1.1 " AFE" means an authorization for expenditure;


1.1.2 "Government" includes an Appointee (which shall be


considered as one of the entities comprising the Contractor)


as defined in Section VI of the Contract;








96


1.1.3 "Joint Account" means the accounts maintained by the


Operator to record all transactions related to operations in


the Participation Area under this Participation Agreement;


1.1.4 "Joint Property" means immovable and moveable property


acquired and held for use in connection with operations


under this Participation Agreement;


1.1.5 "Non-Operator" means a Party other than the Operator;


1.1.6 "Operating Committee" means the committee established by


Section 4 hereof;


1.1.7 "Operator" means the Party designated to conduct the


Petroleum Operations, pursuant to Section 3 hereof and its


successors, when acting as the Operator and not as the


owner of a Participating Interest;


1.1.8 "Participating Interest;' ' means the;-respective undivided


interest of $adh pf the Parties..a.S it-.may exist at any given


time in. th'e. .Participation Ar.ek arid under this Participation


Agreement;'- V


1.1.9 "Participation \Area"v' means the Field in which the


Government'' - has elected to participate pursuant to the


Contract; \ ’•


1.1.10 "Participation Date" means the effective date of


participation by the Government in accordance with Section


VI of the Contract;


1.1.11 "Participation Work Program" means a program of


Petroleum Operations under this Participation Agreement;


1.1.12 . "Parties" means all of the entities constituting the


Contractor collectively, their respective successors and


assignees;


1.1.13 "Year" means Calendar Year.





1.2 Words not defined in this Participation Agreement but which are defined


in the Contract have the meanings given to them therein..


1.3 Nothing herein shall be construed to abridge or adversely affect any right


of any party under the Contract.














97


2 PARTICIPATING INTERESTS





2.1 Pursuant to Section VI of the Contract, each entity previously


constituting the Contractor has assigned proportionately to_a part of


its Participating Interest in_Field so that the rights, interest and


obligations of the Contractor in such Field shall be owned and borne as


of the Participation Date in undivided interests as follows:


_ percent (_%)





__ percent (_%)


_ percent (_%)





_ percent (_%)








3 OPERATOR AND DUTIES OF tfe OPE


3.1 The _Company, '-shall' serve as Operator until it resigns or is


removed pursuant.tb the provisions'of this Section, or until it ceases to


hold a Participating Interest -hereunder. In the event that an Operator


assigns the whole of its iRfirticipating Interest hereunder to one of its


Affiliates, such Affiliate., shall become an Operator hereunder in the


former's place,-----*


3.2 Upon the affirmative vote of at least fifty percent (50%) of the


Participating Interests of the Non-Operators, the Operator shall be


removed as Operator in case of any one of the following:


3.2.1 Bankruptcy of the Operator or its parent company;


3.2.2 Assignment for the benefit of Operator's creditors;





3.2.3 Appointment of a receiver or trustee with respect to the


whole or any part of the property or Assets of the Operator;


3.2.4 Entitlement of any person other than an Affiliate of


Operator to appoint a majority of the members of the board


of directors of the Operator by reason of any act, default or


neglect of the Operator;


3.2.5 Operator's material breach of this Participation Agreement


which remains unremedied for more than sixty (60) Days


after the Operator is notified by Non-Operators of such


breach; or





98


3.2.6 Reduction in the Operator's Participating Interest to ten


percent (10%) or less.


3.3 An Operator may at any time resign as Operator by giving to the other


Parties notice in writing of such resignation. Such resignation shall be


effective one hundred eighty (ISO) Days after the date of notice thereof


or on the date on which a successor Operator appointed by the Parties


(other than the Operator) shall be ready and able to assume the


obligations of the Operator in accordance with all the provisions of this


Participation Agreement, whichever shall first occur.


3.4 Should an Operator so resign or be removed, a successor Operator shall


immediately be appointed by the Operating Committee. A Party having


been removed as Operator may not vote to succeed itself as Operator.


Such appointment shall be made by a vote in the manner prescribed in


Section 4.6 hereof. For the purpose of this Section 3.4 the Operator


includes any of its Affiliates holding; a-Participating Interest in this


Participation Agreement. .....X V*4


3.5 Removal or resignation pf\an..'Operator shaft riof in any way affect its


rights or obligations-^s 'a -Noh-Operator P.aity to this Agreement. On the


effective date of removal or resignation, the Operator shall deliver to the


successor Operator any.. and. aft ' funds, equipment, materials,


appurtenances, books^ records/data, interpretations, information and


rights acquired by..-and\ifr 'the custody of the Operator for the Joint


Account of the-Parties (including available Petroleum not delivered to


the Parties) and shall, with the successor Operator, prepare an inventory


of Joint Property, adjusting the Joint Account accordingly, and shall


cooperate as far as possible in effecting a smooth transfer of operating


responsibilities. A change in Operator shall not relieve the departing t


Operator of any of its liabilities and obligations accrued before the date


of changeover.


3.6 Should there be a change in Operator under the provisions of Section 3.5


above, all necessary and reasonable costs of effecting such change, as


determined by the Operating Committee,, shall be charged to the Joint


Account.


3.7 The Operator shall have control of Petroleum Operations in the


Participation Area subject to the directives of the Operating Committee


and shall have exclusive custody of all materials, equipment and other


property acquired therefor, and shall perform its duties under this


Participation Agreement diligently and in accordance with the approved


Participation Work Programs and budgets and the Contract. The


Operator shall not be liable to any Non-Operator for any acts or


omissions, claim, damages, losses or expenses, in connection with or


arising out of the Participation Agreement or the Contract or Petroleum


Operations save those caused directly by willful misconduct of the


Operator.


99


 3.8 The Operator Shall:


Consult with Non-Operators and advise them of all matters


3.8.1


arising from the Petroleum Operations;


3.8.2 Comply with the decisions of the Operating Committee;





3.8.3 Keep the Participating Interests and all property acquired or


used free from liens, except for those authorized by Section


3.8.4 6 hereof; and


Pay the costs of the Petroleum Operations under this


Participation Agreement promptly and make proper charges


to Non-Operators.


3.9 The Operator shall submit a copy of an AFE to the Non-Operators for


prior approval for each budget .itern\ of .••capital expenditure in the


approved Participation Work Prdgrairi. and budget that costs more than


two hundred and fifty thousand. -'Dollars ,j(-S25 Q-,f)00). Where it is


necessary to complete ••'ari) expenditure in a. biidget' item in the approved


Participation Work program, the Qper^i'Or- may exceed the budget for


the budget item’by- the lesser •.of-.fen. percent (10%) thereof or one


hundred thousand Dollars ••;($. 10.0;000) and shall report promptly such


excess expenditure tothe-ffon-Operators.


The Operator.mayspend not more than fifty thousand Dollars ($50,000)


on Petroleum Operations in the Participation Area not included in an


approved Participation Work Program, provided that such expenditure


shall not be for items previously rejected by the Operating Committee.


The Operator shall report promptly that expenditure to the Non-


Operators and, if it is approved in accordance with Section 4.6 hereof,


the Operator may make further expenditure thereon or on other items


not exceeding fifty thousand Dollars ($50,000) in that Year.


The limits in this Section 3.9 may be changed from time to time by an


unanimous decision of the Operating Committee.


In case of emergency, the Operator may make such immediate


expenditure and take such immediate action as it may deem necessary for


the protection of life or property or the prevention of pollution and such


emergency expenditure shall be reported promptly to the Parties by the


Operator.


3.10 A Non-Operator may inspect the Participation Area, the Petroleum


Operations, and the books, records and other information of the


Operator pertaining thereto.








too


The Operator shall supply to a Non-Operator by telephone, telefax,


telegraph, or telex, daily on drilling, production reports and such other


reports in writing normally provided by an Operator to a Non-Operator


in the international petroleum industry, including but not limited to


reports on well tests and core analysis, and copies of drilling logs, well


surveys and velocity surveys. The Operator shall furnish any other


information reasonably requested by a Non-Operator.


3.11 The Operator shall obtain and maintain all insurance required by law and


the Contract, and such other insurance as the Operating Committee may


from time to time determine, provided that, in respect of such other


insurance, any Party may elect not to participate provided such Party


gives notice to that effect to the Operator. The cost of insurance in


which all the Parties are participating shall be for the Joint Account and


the cost of insurance in which less than all the Parties are participating


shall be charged to such Parties individually. The Operator. shall, in


respect of any insurance: .


3.11.1 promptly inform the'Parties participating therein when it is


taken out and " supply them with-, copies of the relevant


policies wfieh the same are issued* v


3.11.2 arfaiige for the Parties participating therein, according to


their respective Participating Interests, to be named as co¬


insureds. tffl.-tile relevant policies with waivers of subrogation


in favor of: the Parties; and


3.11.3 duly file all claims and take all necessary and proper steps to


collect any proceeds and, if all the Parties are participating


therein, credit them to the Joint Account or, if less than all


the Parties are participating therein, credit them to the


participating Parties.


Subject as stipulated above, any of the Parties may obtain such insurance


as it deems advisable for its own account at its own expense providing


such insurance is acceptable under the applicable law. All policies shall


provide for a waiver of subrogation in favor of the other Parties.


If the Operator is unable to obtain such other insurance required by the


Operating Committee, it shall so advise the Parties and thereafter, it shall


be discharged of its obligation to obtain such insurance.


The Operator shall guarantee that all Subcontractors performing work in


respect of the Petroleum Operations and the Joint Property obtain and


maintain all insurance required by law and the Contract and such other


insurance as the Operator may require and obtain from their insurers a


waiver of subrogation in favor of the Parties.








101


 Each of the Parties shall, in respect of its Participating Interest share of


any liability to third parties which may arise in connection with the


Petroleum Operations, obtain and maintain insurance or other evidence


of financial responsibility as may from time to time be determined by the


Operating Committee or be required by law and the Contract. Each of


the Parties shall, as and when required by the Operating Committee,


produce to it such evidence as it may reasonably require to establish that


such insurance or other evidence of financial responsibility is being


maintained. All policies shall provide for a waiver of subrogation in


favor of the other Parties.


3.12 Without prejudice to the provisions of Section 4.2.5 hereof the





Operator shall handle all claims and litigation arising out of the


Petroleum Operations other than claims and litigation which may arise


between or among any of the Parties and may settle any such claims or


litigation which involve an amount not exceeding the equivalent of one


hundred thousand Dollars ($ 100,000).".'.per occurrence without the


approval of the Operating Committee*. \ A»y claim or litigation involving


an amount in excess of the equrvalerrt of one hundred thousand Dollars


($100,000) shall be repqrted:pfom'ptly to the'Nqri-’tjperators and a Non-


Operator shall have the,right to be represented by its own counsel at its


expense. ..•••• V-:0 C..


3.13 The Operator shall fulfill' the’ reporting obligations of the Contractor


arising under the..Contract unless otherwise stipulated in this


Participation Agreement and the Contract.





3.14 In case of any proposed services and supply contract for the Petroleum


Operations where the cost thereof will or is likely to exceed three


hundred thousand Dollars ($300,000) or such other amount as may from


time to time be determined by the Operating Committee, the Operator


shall use its best endeavors to obtain competitive bids.








4 OPERATING COMMITTEE AND WORK PROGRAMS





4.1 The Parties shall establish an Operating Committee to supervise and


control the Petroleum Operations. The Operating Committee shall meet


in Asmara unless it decides on another location. Without prejudice to


Section 9 5 herein the Operating Committee shall consist of one


representative and one alternate representative appointed by each of the


Parties provided always that more than one of the Parties may appoint


the same representative who shall represent each of them separately.





Each Party shall, as soon as possible after the effective date of this


Participation Agreement, give notice to all the other Parties of the name


of its representative and of its alternate on the Operating Committee.


Such representative may be replaced, from time to time, by like notice.


Representatives may bring to the meetings of the Operating Committee


102


 such advisers as they consider necessary. The representative of a Party


or, in the absence of the representative, his alternate, shall be deemed


authorized to represent and bind such Party with respect to any matter


which is within the powers of the Operating Committee and is properly


brought before the Operating Committee. The representative of the


Party which is the Operator shall be the chairman of the Operating


Committee and shall report the proceedings.





4.2 Except as otherwise provided in this Participation Agreement, the


powers and duties of the Operating Committee shall include:





4.2.1 the consideration and determination of all matters relating to


general policies, procedures and methods of the Operator


hereunder;





4.2.2 the approval of any public announcement or statement


regarding this Participation1'Agreement or the Petroleum


Operations conducted, vpjarsu'ant to. this Participation


Agreement; . ( ') '• . \..-*


4.2.3 the considepatiori, revision,-.ajrid approval or disapproval, of





all .. proposed Participation Work Programs and budgets


prepared and submitted to it pursuant to the provisions of


this Participation-Agreement;





4.2.4 the • determination of the timing and location of all Wells


drilled* under this Participation Agreement and any change in


the use or status of a Well;





4.2.5 the determination of whether the Operator will represent the


Parties regarding any matters or dealings with the


Government or third parties insofar as the same relate to


the Petroleum Operations, provided that there is reserved to


each Party the unfettered right to deal with any


governmental authorities in respect of matters relating to its


own Participating Interest; and





4.2.6 the consideration and, if so required, the determination of


any other matter relating to the Petroleum Operations which


may be referred to it by the Parties or any of them.





4.3 The frequency of meetings of the Operating Committee shall be


determined by that Committee except that they shall be held not less


frequently than quarterly when major development operations are


contemplated or in progress and not less frequently than semi-annually at


other times. In addition, the Operator or two Non-Operators may call a


special meeting at any time. A single Non-Operator may call one special


meeting of the Operating Committee in any one Year





103


A request to call a meeting of the Operating Committee shall state the


purpose of that meeting and, except in an emergency, the Operator or


the other Parties calling a meeting shall give the Parties at least fifteen


(15) Days' written notice with an agenda of the meeting, but where a


meeting is called in an emergency, the Operator shall give as much notice


thereof as possible by telephone, telex or telegraph and except with the


consent of all the Parties, the business of a meeting shall be only that for


which it was called.


The Operator may, instead of calling a meeting, submit matters to


the Parties by written notice including telex, upon which each


Party may vote within the period prescribed in the notice which


shall not be less than three (3) days or more than fifteen (15) days


from the date notice is received. Failure of a Party to respond


within the above time limits shall be deemed a negative vote. If


the decision called for concerns an active operation where a rig is


on location, failure of a Party to respond shall be deemed to be an


affirmative vote. In the event-..of.\alf' emergency the aforesaid


periods may be reduced by.. Operator, as necessary. -*'


Each Party shall haye aVo'ting interest equal td its Participating Interest.


Unless otherwise'provided in this-Participation Agreement, all decisions


of the Operating -Committee shall .be made by the affirmative vote of one


or more Parties holding. not'-Tess’than __ (_%) of the Participating


Interest. A timely'‘wrifteii* vote, including by telex and facsimile, is


permitted. The-Operator shall notify the other Parties of any decision


taken pursuant to..-Section 4.5 hereof.


The decisions of the Operating Committee shall be reduced to writing


and initialed by the Participating Parties prior to the end of the meeting.


The Operator shall cause the initialed minutes of the proceedings to be


circulated to the Parties within twenty (20) Days after the meeting.


Comments and edits by the Non-Operators shall be attached and made a


part of the minutes


Except as otherwise provided in Sections 9 and 11 hereof, any matter


involving surrender or the drilling of an Exploration Well shall require


the unanimous consent of all Parties.


The Operator shall, at least four (4) months before the end of each Year,


submit to the Parties for approval a Participation Work Program and


budget, which shall contain details of the Petroleum Operations to be


carried out in the next Year and allocation of funds therefore including


administrative overheads and third party expenditure


Unless otherwise unanimously agreed, at least sixty (60) Days prior to


the beginning of the Year, the Operator shall call a meeting of the


 Operating Committee to discuss and approve a Participation Work


Program and budget for the ensuing Year and such Work Program and


budget shall be approved not later than thirty (30) Days prior to the


commencement of such Year and the decision of the Operating


Committee shall bind the Parties. Upon approval of such work program


and budget the Operator is thereby authorized and obliged to proceed


with it in accordance with such approval, consistent with Section 3.9


hereof.





4.10 The Operating Committee may decide from time to time to establish


such advisory committees as it deems desirable. The Operating


Committee shall prescribe in writing the organization, duties and modus


operandi of such advisory committee.








COSTS AND EXPENSES





5.1 Except as otherwise specifically, /-prb-yide'd in the. Contract and this


Participation Agreement, alj .costs ahd expenses iiicurbed by the Operator


in the conduct of Petroleum Operations hereunder shall be borne by the


Parties in proportion. td lKeirTespective-Participating Interests set forth in


Section 2 hereof-.. For-purposes of.this Participation Agreement costs


and expenses incurred by the Operator’shall not include interest or other


financing charges incurred 'by any Party in respect of loans raised to


finance contributions lo’costs and expenses hereunder.


5.2 All costs and expenses incurred by the Operator in the conduct of


Petroleum Operations hereunder shall be determined and settled in





accordance with the provisions of the Contract. The Operator shall keep


its records of costs and expenses in accordance therewith.








BANK ACCOUNTS, PAYMENTS TO THE OPERATOR AND


DEFAULT





6.1 Bank Accounts and Payments to the Operator





6.1.1 Each Party shall pay when due, its Participating Interest share of [........]


Field Joint Account costs and expenses, including any cash call amounts


pursuant to the provisions of this Section 6.1, and any interest in the


event of tardy payment accrued in accordance with this Participation


Agreement.





6.1.2 Operator shall open one or more bank accounts (hereafter called “the


Joint Bank Account(s)”), separate and distinct from its own bank


accounts as a Party, into wliich all funds held or received for the


purposes of financing Petroleum Operations shall be deposited and from


which all disbursements shall be made.





105


Any excess cash in Joint Bank Accounts may be invested in


interest-bearing short-term deposits and the Parties shall own them


in the ratio of their Participating Interests.


6.1.3 The Operator shall maintain adequate records (including a statement of


expenditures) for the Joint Bank Accounts which shall be furnished to


all Parties consistent with the Accounting Procedure.


6 1.4 The Operator may, upon fifteen (15) Days' advance written notice to the


Parties, request all Parties to advance their shares of the estimated


expenditure for the following month, stipulating the due date of payment


and the currencies required, provided, however, that such due date of


payment shall be the same for all Parties. The Operator may, at any


time upon fifteen (15) Days' written notice to the Parties, request


additional cash calls to cover unforeseen expenditures.


6.1.5 With the objective of preventing excess fends from accumulating in the


Joint Bank Accounts, the Operator. may,' Whenever appropriate, adjust


the cash call schedule as appropriate. ‘‘ . • ..•••


6.1.6 If any Party remits for k-given period an-ajmoiint which exceeds its share


of cash disbursenjenfs for the same.jjeriod, the next succeeding cash call,


after such determination, shall b.e reduced accordingly.


6.2 Default of Payment A '


6.2.1 Any Party that fails to pay when due its Participating Interest share


of Joint Account expenses, including cash advances and interest,


accrued pursuant to this Agreement (hereafter a “Defaulting Party”)


shall be in default under this Agreement. Operator, or any other Party


in the case of the default of Operator, shall promptly give written


notice of such default to such Party and each of the non-defaulting


Parties. The amount not paid by the Defaulting Party shall bear


interest from the date due until paid in fell. Interest will be calculated


using the agreed interest rate pursuant to the Contract.


Provided that where the Government is a defaulting Party, all of its


rights under the Contract and relevant Proclamations and all


regulations shall remain intact.


6.2.2 After any default has continued for ten (10) business Days from the


date of written notice of default under Section 6 2 .1 hereof, and . for


as long thereafter as the Defaulting Party remains in default on any


payment due under this Agreement, the Defaulting Party shall not be


entitled to attend Operating Committee meetings or to vote on any


matter coming before the Operating committee during the period


such default continues. Unless agreed otherwise by the non¬


defaulting Parties, the voting interest of each non-defaulting Party





10G


shall be in the proportion which its Participating Interest bears to the


total of the Participating Interest of all the non-defaulting Parties.


Any matters requiring unanimous vote of the Parties shall be deemed


to exclude the Defaulting Party. After the said ten (10) business Days


and while the Defaulting Party remains in default as aforesaid, the


Defaulting Party shall not have access to any data or information


relating to joint operations, and non-defaulting Parties shall be


entitled to trade data without such Defaulting Party’s consent and


the Defaulting Party shall have no right to any data received on such


trade unless and until its default is remedied in full. Notwithstanding


the foregoing, the Defaulting Party shall be deemed to have


approved, and shall join with the non-defaulting Parties in taking any


action to maintain and preserve the Contract.


6.2.3 a) Operator shall, either at the time of giving notice of default as


provided in Section 6.2.1 or by, separate notice, notify each


non-defaulting Party of the sum-of money it is to pay as its


portion (such portion ..keing-.\in''*‘the ratio that each non¬


defaulting Party’s..., Participating Intejrpst'-.-bears to the


Participating Interestkofall non-defaiflfing Parties) of such


amount in -.default. Each non-defaulting Party shall, if such


default-.;'continues, pay ..Operator, within ten (10) business


Days after: receipt .of-. £ucli notice, its share of the amount


which the Defaulfiiig 'Party failed to pay. If any non-defaulting


Party fails..-toCpaiy-'- its share of the amount in default as


aforesaid, :-such‘ non-defaulting Party shall thereupon be in


default add shall be a Defaulting Party subject to the


provisions of this Section. The non-defaulting Parties which


pay the amount owed by any Defaulting Party shall be entitled


to receive their respective share of the principal and interest


payable by such Defaulting Party pursuant to Section 6.2.1


hereof.


b) The total of all amounts paid by the non-defaulting Parties for


the Defaulting Party, together with interest accrued on such


amounts, shall constitute a debt due and owing by the


defaulting Party to the non-defaulting Parties in proportion to


such amounts paid. In addition, the non-defaulting Parties


may, in the manner contemplated by this Section, satisfy such


debt (together with interest) and may accrue an amount equal


to the Defaulting Party’s Participating Interest share of the


estimated cost to abandon any Joint Property.


c) A Defaulting Party may remedy its default by paying to the


Operator the total amount due, together with interest


calculated as provided in Section 6 2.1, at any time prior to


transfer of its interest pursuant to Section 9 and upon receipt


of such payment Operator shall remit to each non-defaulting


Party its proportionate share of such amount.


107


 d) The rights granted to each non-defaulting Party pursuant to


this Section shall be in addition to, and not in substitution for,


any other rights or remedies which each non-defaulting


Party may have at law or equity or pursuant to the other


provisions of this Agreement.





MATERIAL AND EQUIPMENT


Subject to the provisions of Section 3. 3 of the Contract all Material and


equipment acquired by the Operator for Petroleum Operations hereunder


shall be owned by the Parties in undivided shares in the proportion of


their respective Participating Interests.


Except as may be otherwise approved by the Operating Committee, the


Operator shall purchase for the Joint Account of the Parties only such


Material and equipment as is reasonably ..required in the conduct of


Petroleum Operations provided'‘■foKiri approved Participation Work


Programs or revisions thereto) The’ Operator-shalf ridt stockpile Material


or equipment for future: iis.e 'without the approval of the Operating


Committee. .. .. \ : . \


Jointly acquired Material ..of equipment declared by the Operator to be


surplus shall be disposed -of in such manner as the Operating Committee


may direct; or, if the 66dk value thereof does not exceed fifty thousand


Dollars ($50,000),; the'Operator shall dispose of same in such manner as


the Operator shall deem appropriate and account for the proceeds in


accordance with the Accounting Procedure of the Contract.


Subject to the provisions of Section 3.3 of the Contract, upon


termination of this Participation Agreement, the Operator shall salvage


for the Joint Account all jointly owned Material and equipment which


can reasonably be salvaged, to be disposed of as provided in Section 7.3


hereof.








RELATIONSHIP OF THE PARTIES AND TAX PROVISIONS


The Parties declare that it is not their intention by entering into the


Participation Agreement to create or be considered as a partnership or


any other similar entity.


In accordance with the Contract each Party shall be responsible for and





shall pay to the Eritrean tax authorities its own taxes, if any, arising out


of operations hereunder.





It is recognized that a Party hereunder may be subject to the laws of its


place of incorporation in addition to the laws of Eritrea.


9 SURRENDERS AND TRANSFERS





9.1 Any Party desiring that all of the Participation Area be surrendered


voluntarily shall notify the other Parties in writing accordingly, specifying


its reasons therefor, and thereafter:





9.1.1 Each Party shall within thirty (30) Days after receipt of said


notice inform the other Parties in like manner whether it


concurs in or opposes the proposed surrender;


9.1.2 If all the Parties concur in the proposed surrender, the


Participation Area shall be surrendered as soon as possible


under the Contract;


9.1.3 If one or more of the Parties shall oppose the proposed





surrender, each Party, desiring to surrender shall, upon


request by the .opposing ’ Parties, v-.t.rkns.fer and convey


without wajTcSitJ of title, free .arid 'clear of all liens, charges


and encurhbnanees and without right to compensation, all of


its • interest *• in the Participation Area and Material left


thereon' to said, opposing’ Party or Parties, who shall be


required to aqcppt siich transfer, each in the proportion that


its Participating Interest hereunder bears to the sum of the


Participating' Interests of all said opposing Parties, or. as


otherwise agreed by the opposing Parties. The transferring


Pkrty or Parties shall bear:


(i) its or their Participating Interest share of costs,





expenses and liabilities incurred hereunder which


are attributable to the Participation Area for the


period prior to the effective date of such transfer


of interest;





(ii) its or their Participating Interest share of all costs


and expenses incurred by the Operator after such


date under any contracts entered into by the


Operator in execution of a Participation Work


Program previously approved by the Operating


Committee;


(iii) its or their Participating Interest share of the





estimated removal, abandonment and


demobilization costs, if any, associated with all


Participating Work Programs previously


approved by the Operating Committee,








109


(iv) its or their Participating Interest share of any


accrued obligations under the Contract which are


not included in (i) or (ii) or (iii) above, but shall


thereafter have no further rights or other


obligations in connection therewith; and


(v) all fines and penalties which may be imposed by


the governmental authorities and all costs and


expenses incurred by the other Parties in


connection with such surrender.


9.1.4 A transfer under Section 9.1.3 above shall be effective as


among the Parties thirty (30) Days after the opposing


Parties' receipt of the transferring Party's first mentioned


notice proposing surrender. Thereafter until such transfer


has received whatever approvals may be necessary under


the provisions of the Contract or applicable law, each


transferring Party shaU.hold at-most legal, but not equitable,


title to the interest '-transferred for. the., benefit of the


opposing Party orP-arfies. AlJ.Pahies' involved in a transfer


shall execute: arid deliver such-documents and do such other


actsas'jjiaybe necessary to'give legal effect to such transfer,


to obtain all approvals'thereof as may be required from the


Government-and otherwise to give effect to the purposes of


this Section:*-.;-,. '•


9.2 No transfer of any‘Merest under this Participation Agreement and the


Contract shall be made by any Party otherwise than in respect of its


undivided interest in all or part of its Participating Interest in this


Participation Agreement and the Contract, and in accordance with the


following provisions of this Section 9.


9.3 If any Party shall receive a bona fide offer for the purchase of all or a


portion of its Participating Interest in this Participation Agreement, the


Contract and the Participation Area, which such offer Party is willing to


accept, the offeree Party shall give notice thereof in writing to the other


Parties.


9.3.1 Such notice shall set forth the identity of the offeror, the


terms and conditions (including monetary and other


consideration) offered in good faith, and all other relevant


particulars.


9.3.2 For the period of thirty (30) Days following the receipt of


such notice, the other Parties shall have an option to


purchase the entire interest proposed to be sold on the same


terms offered by the offeror, as set forth in the respective


offer.








no


9.3.3 If more than one of the Parties should exercise its right to


purchase said interest, each shall have the right to acquire


such interest in the proportion that the Participating Interest


hereunder of such Party bears to the sum of the


Participating Interests of all the Parties exercising such right,


except as they may otherwise agree.


9.3.4 If within such a period of thirty (30) Days, none of the


other Parties shall exercise its rights to purchase said interest


or if none of the other Parties responds to such notice, the


sale to said offeror may be made under the terms and


conditions set forth in the notice given; provided that the


sales shall be consummated and transfer made in accordance


with the Contract and applicable law within six (6) months


from the date of such notice.


9.3.5 For purposes of this Section..$,3, an offer to purchase shall


also include an acceptance-^a-Party's offer to sell.


9.4 The limitations of Section .9 3-••shall not\apph/( to a transfer of a


Participating Interest. by. a'Party to an Affiliate of such Party or by the


Government to -an\ -Appointee, of from an Appointee to another


Appointee, nor shall they apply to a transfer of a Participating Interest


effected as a result of merger, consolidation, reorganization or sale of


capital stock of the parent''ooihpany of a Party.


9.5 Every transfer-’of a-Participating Interest in the Participation Area shall be


made expressly‘Subject to this Participation Agreement and the Contract


and shall include a corresponding interest in jointly acquired equipment


and facilities. No transfer of an interest hereunder shall be effective


unless made by an instrument in writing duly executed by the Parties


hereto in accordance with applicable law, and until the same has received


all consents required under this Participation Agreement and the


Contract. A transfer shall provide that the transferor remains liable for


obligations incurred before the date of transfer and such obligations shall


in addition become the obligations of the transferee. Where transferor


disposes of less than its entire Participating Interest and after the transfer


either the transferee or the transferor owns a Participating Interest of less


than ten percent (10%), they shall be required to jointly nominate a single


representative on the Operating Committee; however, such


representative shall be free to vote separately the Participating Interests


of the Parties it represents.


9.6 If a transferee other than an Affiliate of an Appointee is not of sufficient


financial standing to meet its Participating Interest share of its obligations


under the Contract and this Participation Agr eement no Party hereto is


required to consent to any transfer.








ill


9.7 In this Section, transfer means an, assignment, sale or other disposal of


the interest of a Party.


10 DISPOSAL OF PRODUCTION


10.1 Each Party shall separately own, take in kind and dispose of its


Participating Interest share of that portion of the Petroleum produced


and saved from the Participation Area which is available to the Parties


under the terms of the Contract.


10.2 Contractor's entitlement to Petroleum shall be shared among the Parties


in proportion to their actual respective contributions to costs incurred


under the Contract and not yet recovered until such time as the Party or


Parties which have contributed to Exploration Costs have recovered


such Exploration Costs provided that Operating Costs and such


Exploration Costs, in that order, shall be.deemed recovered prior to any


other costs from the share of Petroleum-' accruing to such Party or


Parties. f •; ’ v-.. \


10.3 Within six (6) mpnihs:-following thesigmng of this Participation


Agreement, the'Parties' shall, ip. accordance with the provisions of


the Contract and in light \6f die gathering and transportation


facilities available under the adopted development plan, establish


a set of rules governing the scheduling, lifting and other necessary


provisions for th6..oj0ftake of Crude Oil by the Parties, consistent


with generally accepted international petroleum industry practice,


which shall provide, among other things, such detailed terms and


procedures as required for:





10.3.1 Short-term production forecasts;


10.3.2 Nomination and calculation of entitlements,


10.3.3 Scheduling of deliveries;





10.3.4 Lifting tolerances;





10.3.5 Underlift, overlift and make-up provisions;





10.3.6 Passage of title and risk, and


10.3.7 Other related matters.





Whatever is mutually agreed to by the Parties shall be deemed to form


part of this Participation Agreement.








112


 The above terms and procedures shall apply separately to each grade of


Crude Oil that is segregated and separately stored for offtake.


In the event of production of Associated Natural Gas or of any





Discovery of Natural Gas, the Parties shall agree upon appropriate


procedures for disposal of any Natural Gas available under this


Participation Agreement and the Contract.








SOLE RISK OPERATIONS


Any Party may undertake Petroleum Operations at its sole risk in the


Participation Area, in accordance with the provisions of this Section.


Such sole risk Petroleum Operations, which include not only the drilling


and the construction phase of the project but also the operations of sole


risk facilities, are hereinafter referred to as a "Sole Risk Project".


The following are the only types qf -Sole-Risk Project which may be


proposed: '• v--.. . ..-


The Diillmg,-:.cdmpleting and’ equipping for production of


11.2.1


any-Exploration WeU iri-. qrder to test a formation in which


no jointly owned. Well ‘has been completed as a Well


producing or capable of producing Petroleum; or





11.2.2 The..installation of storage and transportation facilities the


purpose of which is not to increase or accelerate production


ofPetroleum from the Participation Area.








The conduct of a project in the Participation Area may not be the subject


of a sole risk notice under this Section until after it has been proposed in


complete form to the Operating Committee for consideration pursuant to


Section 4 hereof and has not been approved within the period therein


provided.


In the event that such project fails to obtain the requisite approval of the


Operating Committee, any party may serve notice on the other Parties of its


intention to carry out that project at its sole risk. The other Parties may give


counter notice within sixty (60) Days after receipt of that notice that they


wish to participate in the project. The period set forth in this Section 11.3


shall be extended for any period of time unanimously agreed to by the


Parties as necessary or desirable for acquiring or developing additional


information on the Sole Risk Project.


If all the Parties elect to participate in the project identified in proposing


Party's notice within the period provided in Section 11.3, such project shall


be deemed approved by the Operating Committee pursuant to the provisions


of Section 4.9 of this Participation Agreement.


In the event that less than all the Parties elect to participate in the project, the


Party or Parties which elected to participate (hereinafter referred to as "Sole


Risk Parties") shall be entitled to have the Sole Risk Project carried out


subject to the provisions of Sections 11.7 to 11 13, if applicable to such type


of Sole Risk Project.


The interest of the Sole Risk Parties in a Sole Risk Project shall be in


proportion to their Participating Interest in this Participation Agreement, or


in such other proportion as the Sole Risk Parties may agree upon. Any Sole


Risk Project shall be carried out at the sole risk, costs and expense of the


Sole Risk Parties.


No Sole Risk Project may be commenced.


(a) after one hundred and eighty (ISO) Days following the expiry of the


notice period prescribed in Section 11.3 in case of a project under


Section 11.2.1; or -. (.....


(b) after three hundred and/sixty-fiVe (365) D^ys following the expiry of


the notice prescribed iiri Section 11.3-in basis of project under Section


11.2.2. \


The Operator carrying out the Sole RiskProject shall complete the Sole Risk


Project with due diligence, unless the Operating Committee has determined


that the Sole Risk Project--jeopardizes the economic interest of the Parties


who are not Splq Risk! Parties, or unreasonably interferes with Petroleum


Operations carried out under the Contract and adopted by the Operating


Committee pursuant to Section 4 of this Participation Agreement, in which


event the Sole Risk Project shall not be carried out.


The Sole Risk Parties may use for the Sole Risk Project any production,


handling, processing or transportation facilities which are Joint Property,


provided the terms and conditions of such use are unanimously agreed upon


among the Parties.


In connection with any Sole Risk Project:


(a) the Sole Risk Project shall be carried out under the overall


supervision and control of the Sole Risk Parties in lieu of the


Operating Committee;


(b) the computation of costs and expenses of the. Sole Risk Project


incurred by the Sole Risk Parties shall be made in accordance with


the principles set out hereinafter ;


(c) the Operator carrying out the Sole Risk Project shall maintain


separate books, records and accounts (including bank accounts) for


the Sole Risk Project which shall be subject to the right of


examination and audit by the Sole Risk Parties in the manner


provided in the Accounting Procedure;


(d) the costs and expenses of the Sole Risk Project incurred by the Sole


Risk Parties shall not be reflected in the statements and billings


rendered by the Operator for Petroleum Operations under the


Participation Agreement; and


(e) if the Operator is cariying out a Sole Risk Project on behalf of the


Sole Risk Parties, the Operator shall be entitled to request the Sole


Risk Parties to advance their share of the estimated expenditure and


shall not use Joint Account funds or be required to use its own funds


for the purpose of paying the costs and expenses of the Sole Risk


Project; furthermore the Operator shall not be obliged to commence,


or having commenced, to continue the Sole Risk Project unless and


until the relevant advances have been received from the Sole Risk


Parties. •.


11.10 The Sole Risk Parties shall indemnify^ and hold harmless the other Parties


against all actions, claims, demand-s and proceedings whatsoever brought by


any third party arising biil-pfor in connection with the Sole Risk Project and


shall further indenjntfy t-he other Parties against all damages, costs, losses and


expenses whatsoever directly.or indirectly caused to or incurred by them as a


result of anything done of . brnitted to be done in the course of carrying out


such Sole Risk ProjeGt, '\' --.\ -


11.11 Subject to the provisions under Section 11.12.2 below, the Sole Risk


Project, including' data and information, shall be wholly owned by the Sole


Risk Parties in accordance with the provisions of the Contract, but the Sole


Risk Parties shall keep the other Parties fully and continuously informed


about the Sole Risk Project in accordance with the relevant provisions of this


Participation Agreement.


1112 In the event that any Exploration Well drilled as a Sole Risk Project is


completed as a producer.


11.12.1 The Contractor's share of production from such oil Well shall


be owned solely by the Sole Risk Parties for so long as the


Parties who are not Sole Risk Parties have not made their


election under Section 11.12.2.


11.12.2 The Parties who are not Sole Risk Parties, by giving thirty


(30) Day’s prior notice to the Sole Risk Parties, may become


participants in such Well at any time after the Sole Risk Parties


have recovered from the Contractor's share of Crude Oil


produced from that Well the following sums of money six


hundred percent (600%) of their sole risk costs plus one


hundred percent (100%) of the costs of operating such Well.





115


The value of the production to which a Sole Risk Party is entitled shall be


determined in accordance with Section XII of the Contract.


From and after the election of the other Parties to become participants in


such Well, the Sole Risk Well and all relevant facilities, equipment and other


property appurtenant thereto shall be owned jointly by the Parties and each


of the Parties shall be entitled to receive its Participating Interest share of the


Petroleum production from such Well.


In case of a Sole Risk Project under Section 11.2.2 hereof the relevant


facilities shall be owned by the Sole Risk Parties at all times during the


period of validity of this Participation Agreement. The Sole Risk Parties


shall not be entitled to receive any Crude Oil by reason of such Sole Risk


Project.








CONFIDENTIALITY





Except as may be otherwise pro^ide.d ih the Contract;.all. information related


to the Petroleum Operations $HaU.b’e confidential kind shall not be disclosed


to a person other than a'Pkrty. except to: \ \ **’





12.1.1 an .- Affiliate wholly, biyried- directly or indirectly by the parent


company ofohe. o'fthe entities comprising the Contractor;


the Oovefriment and other public authorities to the extent


12.1.2


necessary for the purpose of any applicable law;


12.1.3 a stock exchange to which a Party is obliged to make





disclosure;


12.1.4 contractors, consultants, lawyers or arbitrators of a Party,


where disclosure is essential;


12.1.5 a bona fide prospective purchaser of an interest of a Party in





the Contract;


a lender, where disclosure is essential; or


12.1.6


12.1.7 a person to whom disclosure has been agreed upon by the


Parties





All Persons referred to in Section 12.1.1 and Sections 12.1.4 through 12.1.7


above shall undertake written confidentiality obligations and shall have no


further right of disclosure.


A Party making disclosure to a Person described in Sections 12.1.5 and


12.1.6 shall give five (5) Days' prior written notice thereof to the other


Parties.


12.3 The Parties shall consult with each other prior to the release of any public


statement or press release, and, except to the extent required by law, rule or


regulation of any governmental authority or stock exchange, no Party shall


make any public statement or press release without the approval of all the


other Parties, which approval shall not be unreasonably withheld. The


Operator shall utilize its best efforts to co-ordinate all such public statements


to the end that all Parties may effect simultaneous press releases.


12.4 The obligations of the Parties under this Section 12 are continuing


obligations and any Party ceasing to be a Party to this Agreement shall


remain bound by this Section until this Agreement is no longer in force


between any remaining Parties and the Contract has expired.


13 LIABILITY AND MUTUAL UNDERTAKING


13.1 Each of the Parties shall abide by all the provisions of the Petroleum


Proclamation, Petroleum Tax Proclamation, Petrdleum..Regulations and the


Contract and shall do nothing .ip'put the Contractih jeopardy.


13.2 The Parties shall-. be ;'s«verally liable.. in'..accordance with their respective


Participating Interest-to third.parties: 'Each Party shall in no event be liable


for consequential damages-.to .any-, other Party.


13.3 Subject to Section^. 7/hereof, each Party agrees to indemnify each other


Party, to the extent of its Participating Interest share, for any claim by or


liability to (including any costs and expenses necessarily incurred in respect


of such claim or liability) any Person not being a Party hereto, arising from or


in connection with a Participation Work Program.


14 GOVERNING LAW


14.1 This Participation Agreement shall be governed by and be construed in


accordance with the laws of Eritrea.





15 ARBITRATION


15.1 Whenever the Government or its Appointee is a Party to a dispute under this


Participation Agreement, such dispute shall be referred to arbitration in


accordance with Section 16.2 of the Contract. In such event the rights and


obligations of the Contractor under said Section 16.2 shall devolve upon the


Parties to the dispute which are not the Government.











117


 >


16 FORCE MAJEURE


16.1 The provisions of Section 16.3 of the Contract relating to Force Majeure


shall be effective for this Participation Agreement, mutatis mutandis.


17 NOTICES


17.1 All notices and other communications provided for in this Participation


Agreement shall be in writing and shall be delivered by hand or sent by


registered airmail, as appropriate, return receipt requested, or by telegram, or


facsimile (with confirmation by mail) to the Parties at the following


addresses:


To................................................................................................








Facsimile:


Attention














Facsimile:


Attention:


To............











Facsimile:


Attention:


17.2 A notice shall be effective on receipt. Notices given by registered airmail


shall be deemed received on the date shown on the return receipt.


Notices given by telegram, facsimile with a call-back record shall be


presumed received on the working Day at the place of receipt next


following the time of transmissions. Such notices given by telegram or


facsimile shall be promptly confirmed by letter signed by the Party giving


the notice.


17.3 Any Party may at any time and from time to time change its authorized


representative or its address herein on giving the other Parties ten (10)


Days notice in writing to such effect.











118


 18 TERM





18.1 This Participation Agreement shall come into force on the Participation


Date and shall remain in force until:


18.1.1 it is terminated by the written consent of all the Parties;





18.1.2 all the Participating Interests are vest in one Party; or


18.1.3 the expiration or termination of the Contract.





18.2 Before this Participation Agreement is terminated, there shall be a final


accounting and settlement of the Joint Account.





19 FINAL PROVISIONS


19.1 Headings are inserted in this Participation. Agreement for convenience


only and shall not affect, t&e construction or interpretation hereof.


19.2 This Participation} Agreement :.siiaii-..-not be amended, modified or


supplemented except by an'instirument in writing signed by the Parties.


19.3 Subject to the provisions'hereof, this Participation Agreement shall inure


to the benefit {'ofand'b'e binding upon the successors and assignees of the


Parties hereto and each of them respectively.


19.4 In the event where a provision in this Agreement should be considered as


unlawful or unenforceable, the validity of the rest of this Agreement shall


not thereby be affected. The provision found not to conform to the law


shall be modified, whenever possible, so that the purpose it has been


stipulated for can be attained.








IN WITNESS WHEREOF, the Parties hereto have signed this Participation Agreement


on the Day and Year first above written.


WITNESS:...............................................................................................








WITNESS:











119


ANNEX E: LETTER OF GUARANTY FOR THE_ EXPLORATION PERIOD


LETTER OF GUARANTY NO.................................................








To the Minister of Energy and Mines, Asmara.








Gentlemen:


We, the_Bank (hereinafter referred to as The “Bank”), hereby constitute


ourselves as joint and several guarantors for -. VJ. Company (hereinafter referred


to as Contractor), in favor of th.e.. Minister' of Energ^:..Nfines and Water


Resources of the State of Eritrea,.. Asfiiara (hereinafter^ referred to as “the


Minister”) for a sum not exceeding, a maximum .aggregate amount of _


Dollars ($_} in order :t.o\girafantee the.faithfiil compliance by Contractor of


the minimum work program specified ih S.ectiofi_of that certain contract for


Petroleum exploration, development and production by and between the


Government of Eritrea and• •j . ' fc'ompany dated_ (hereinafter referred to


as “the Contract”). ,.■•••. \ /





The obligation which the Bank assumes under the present guaranty is


limited to paying the Minister the amount demanded in its payment request,


provided it does not exceed the amount of the guaranty in effect on the Day the


payment request is made. The amount of the guaranty in effect shall be


understood as that amount remaining after deducting from the original amount


the sum total of the reduction authorizations issued by the Minister and received


by the Bank pursuant to the present guaranty.





1. This is a joint and several, irrevocable, unconditional and automatically


collectible guaranty, payable during the period it is in effect, upon


presentation of a letter addressed by the Minister to the_Bank


requesting payment of a sum no greater than the amount of the guaranty


then in effect, declaring that the Contractor has not complied with the


obligation of the aforementioned minimum work program under the


Contract. The said letter shall be supported by a certified-copy of the


letter sent by the Minister to the Contractor, giving notice of the


Minister's intention to call on the guaranty. The said letter from the


Minister to the Contractor must be dated and have been delivered to


the Contractor not less than thirty (30) Calendar Days before the date


on which the Minister submits its claim to the_Bank for payment


under this guaranty. No other justification shall be required.





12 0


2. When appropriate the Minister may direct the__ Bank to reduce the


amount of the guaranty pursuant to the relevant term of the Contract.


Upon the_Bank’s receipt of the Minster’s notice to reduce the


guaranty, the_Bank shall immediately proceed to deem the


amount of the guaranty reduced by the corresponding sum, and shall


report such event in writing to the Minister and the Contractor. It shall


not be necessary to issue a new guaranty document for the reduced


amount but the original shall be taken as valid only for such amount.


3. The present guaranty shall expire not later than ....months from the date


hereof, that is on the_, unless before that date the • Bank has


received a letter form the Minister releasing the__Bank and the


Contractor from any responsibility under the present guaranty, in which


case the present guaranty shall be canceled as of the date of the


aforementioned letter from the Minister.





From the expiry or cancellation date no claim whatsoever may be made


regarding the present guaranty and the\ ,J Bank and the Contractor


shall be released from any responsibility or obligation regarding the


present guaranty. \ V"





Sincerely,


Bank













































































121